By Sara Sjolin, MarketWatch

LONDON (MarketWatch) -- European stock markets moved cautiously lower on Tuesday, as investors remained wary ahead of the U.S. Federal Reserve's policy meeting, on fears it could signal a potential slowdown in the bank's asset purchases.

The Stoxx Europe 600 index dropped 0.1% to close at 293.02 after swinging between small gains and losses for most of the day.

The index has shaved off 5.7% since May 22, when Fed Chairman Ben Bernanke mentioned a possible reduction to the bank's asset purchases in coming months if data continue to improve. The comments sparked worries that the bank will taper its quantitative-easing program this year, with investors closely awaiting hints from the June policy-setting meeting, which was due to get under way on Tuesday. See: Roubini, Bremmer and the Fed policy that's going to implode

"I think the bold expectations are that we will get some kind of outline on the timing of tapering," said Keith Bowman, equity analyst at Hargreaves Lansdown.

"It's difficult to say how the markets will react to it. They may well come around to see it as a positive, because at the end of the day it's the uncertainty investors don't like," he added.

Among notable movers in the pan-European index, shares of Danske Bank AS posted one of the biggest losses in the index, off 6.1%, after the Danish Financial Supervisory Authority ordered the bank to adjust its internal rating model, saying the lender underestimated its risky assets.

On a more upbeat note, shares of Whitbread PLC gained 3.6% after the hotel and restaurant operator reported a 13.8% rise in total sales, as cold weather boosted sales at coffee shops.

Shares of Kabel Deutschland Holdings AG climbed 3.7% after the firm confirmed late Monday it has received a preliminary takeover proposal from Liberty Global PLC (LBTYA).

Fed meeting on tap

For the broader European stock markets, investors were cautious about placing any big positions ahead of the U.S. Fed's two-day meeting, which ends Wednesday. Fed Chairman Ben Bernanke said in late May that the central bank could start scaling back its $85-billion-a-month asset-purchase program if data continue to improve, fueling fears of market turmoil.

"On QE tapering, we think Bernanke will repeat the message that the timing of tapering is completely data-dependent. He is unlikely to give more-precise indications than to repeat that if the labor market continues to improve, QE tapering could start within the next few meetings. We continue to see a 50/50 chance of a September or a December start to tapering," analysts at Danske Bank said in a note.

"So far, job growth is set to stay around the 170,000 level in June, based on the most recent jobless claims data. This is just enough to keep expectations for a September move alive, but if inflation expectations continue to trend lower over the coming months and job growth stays below 200,000, this could push the first tapering into December," they added.

Inflation was also in the U.S. data headlines on Tuesday, after a report showed the consumer-price index rose a seasonally adjusted 0.1% in May, as the inflationary pressure on the broader economy was largely subdued.

Additionally, U.S. housing starts picked up 6.8% in May, signaling continued healthy activity in the building sector.

U.S. stocks traded higher on Wall Street.

Back in Europe, the ZEW indicator for economic sentiment in Germany improved 2.1 points in June to 38.5, slightly better than expectations of a 38 print.

Movers

Among notable movers in Europe, car makers posted some of the biggest losses after data showed new car registrations in the European Union dropped to the lowest level in 20 years in May.

Shares of Daimler AG lost 0.9% in Frankfurt, BMW AG shaved off 1% and Volkswagen AG fell 0.3%.

Germany's DAX 30 index , however, closed 0.2% higher at 8,229.51, with banks on the rise. Shares of Commerzbank AG added 2.1% and Deutsche Bank AG (DB) put on 1%.

France's CAC 40 index dropped 0.1% to 3,860.55.

The U.K.'s FTSE 100 index climbed 0.7% to 6,374.21, boosted by HSBC Holdings PLC (HBC) . The bank climbed 2.1% after Citigroup lifted the stock to buy from neutral.

Shares of EasyJet PLC added 2.2% after the budget airline said it would buy 135 A320 planes from Airbus for delivery between 2015 and 2022.

Outside the major indexes, shares of Aveva Group PLC picked up 5.4% after Citigroup lifted the software firm to buy from neutral.

Shares of Royal Imtech NV sank 11.5% after the infrastructure firm reported a loss of 59.6 million euros ($79.7 million) for the first fiscal quarter and said it had a difficult quarter.

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