By Carla Mozee, MarketWatch

LONDON (MarketWatch) -- European stocks dropped Tuesday, with the losses picking up pace following reports that the crisis in Ukraine had escalated.

The Stoxx Europe 600 index closed lower by 1% at 326.58 after a flurry of late-afternoon reports about various military activity in Ukraine, stoking fears that the country is on the brink of a civil war.

Russian news agencies reported Kiev-led forces had surrounded the city of Slavyansk in eastern Ukraine, with ITAR-TASS quoting Slavyansk's acting mayor as saying armored vehicles were in place around the area. Meanwhile, part of Russia's 45th Airborne Regiment was seen in the towns of Kramatorsk and Slavyansk, Ukrainian First Deputy Prime Minister Vitali Yarema said on television, according to a Bloomberg report.

Earlier Tuesday, Ukraine launched a military operation to win back control of eastern Ukrainian cities from pro-Russian activists. Russia's state-run RIA Novosti news service reported that four militants were killed and two wounded when Ukrainian forces stormed an airport in Kramatorsk, according to Bloomberg.

The crisis in Ukraine appears to have hurt investor confidence in Germany, Europe's largest economy, said the Center for European Economic Research, or Zew institute on Tuesday. Its six-month expectation index in April reached 43.2, falling from 46.6 in March, marking the fourth-consecutive month of declining confidence. Analysts polled by The Wall Street Journal were looking for an April reading of 45.0.

Momentum picked up in Germany's economy at the start of the year, but the "cautious expectations in this month's survey are likely to be caused by the Ukraine conflict, which still creates uncertainty," said the ZEW institute.

German stocks, as gauged by the DAX 30 index fell further as the session headed toward the close, and finished down by 1.8% at 9,173.71. Russia's blue-chips MICEX index lost 2.5% to settle at 1,311.01, and Russia's RTS index was shoved 3.1% lower to 1,141.96.

The U.K.'s FTSE 100 fell 0.6% to 6,541.61, and France's CAC 40 gave up gains, closing down 0.9% at 4,345.35.

Among individual movers, L'Oreal SA rose 1.1%, adding to Monday's climb of 2.8% after the cosmetics firm forecast a rise in sales and profit this year. Its revenue for the first quarter fell 2.2% on a year-over-year basis, dented by weak currencies in its markets.

Nestlé SA shares reversed gains and slipped 0.2%, with the food producer saying first-quarter sales fell 5.1% on weakness in two key regions and a strong Swiss franc. Drug maker Roche Holding AG also flagged the impact of the strong Swiss currency, posting a 1% decline in first-quarter revenue as it hurt the value of growing sales of Roche's cancer drugs. Excluding the currency impact, sales rose 5%. Roche shares fell 0.4%.

Imperial Tobacco Group tacked on 0.3% after the British company said 900 jobs will be lost as part of its restructuring effort.

But shares of Banca Monte dei Paschi di Siena SpA stood out as the worst performer on the Stoxx 600 by stumbling 10.4%. The struggling Italian lender is considering raising up to 5 billion euros ($6.91 billion) in a share sale, more than the 3 billion euros it previously planned to raise. The company needs to repay a government loan of EUR4.1 billion, and if the share sale doesn't occur this year, the bank faces nationalization.

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