By Sara Sjolin, MarketWatch

LONDON (MarketWatch) -- European stock markets erased earlier gains on Thursday as Russia planned to launch military exercises near the Ukraine border in response to the latest clashes between pro-Russian activists and Ukrainian forces.

The Stoxx Europe 600 index dropped 0.3% to 333.90, pulling back from trading as high as 337.84 earlier in the day.

The benchmark turned lower in afternoon action after news reports said Russia will start new military drills near the Ukraine border in response to the latest clashes, in which at least five pro-Russian activists were killed, in eastern Ukraine. According to The Wall Street Journal, Russia's defense minister also said the exercises will include air operations near the Ukrainian border.

"Traders are taking this threat very seriously and we have seen a hasty change in sentiment on our end," said Naeem Aslam, chief market analyst at AvaTrade, in a note. "If Russia does follow its plan, then we will anticipate a further sharp selloff across the board for the equity markets."

Russia's blue-chip MICEX index slid 2.4% to 1,297.67.

Among other European benchmarks, Germany's DAX 30 index was also hit by the turmoil due to the country's big exposure to Russia. The index slumped 1.1% to 9,436.09. Car makers posted some of the biggest losses in Frankfurt, with BMW AG down 2.4% and Volkswagen AG off 1.2%.

The U.K.'s FTSE 100 index slipped 0.1% to 6,672.19, while France's CAC 40 index fell 0.1% to 4,447.27.

Shares of Alstom SA rallied 11% in Paris after reports that General Electric Co. (GE)is looking to buy the French industrial company. Ishaq Siddiqi, market strategist at ETX Capital, said in a note such a takeover would be the biggest in GE's history and that it would make "complete strategic sense."

"GE is basically in every one of Alstom's businesses plus more," he said. "If GE manages to charm Alstom into its arms, the deal would be worth 5% of the U.S. giant's market cap -- expect GE shares to jump at the Wall Street open later." GE shares were up 0.5% in early U.S. premarket action.

A representative from Alstom said in a statement that the company is unaware of any potential offer and that the group will use its annual report on May 7 as an "opportunity to give an update on the prospects of its activities." A representative from GE declined to comment on the report.

Earlier in the day, European markets broadly found support in the latest comments from ECB President Mario Draghi. Speaking at a conference in Amsterdam he commented on the strong euro exchange rate and said it is an "increasingly important factor" in monetary policy, which could trigger additional easing action.

"A rise in the exchange rate, all else being equal, implies a tightening of monetary conditions, a downward impact on inflation and potentially a threat to the ongoing recovery. If so, this would call for policy action to maintain the current accommodative stance," Draghi said in his speech.

Discussing the low inflation level in the currency union, Draghi said a worsening of the medium-term inflation outlook may call for a broad-based asset-purchase program. The euro (EURUSD) dropped to $1.3816 from $1.38180 late Wednesday.

The European benchmarks also held on to gains in the morning after the German Ifo business-climate index rose to 111.2 points in April, up from 110.7 in March and beating expectations of a small decline.

In corporate news in Europe, shares of AstraZeneca PLC (AZN) climbed 2.8% in London after the drug maker confirmed its 2014 financial guidance. The company, however, posted a fall in first-quarter profit as sales of its best-selling drugs continued to be squeezed by generic competition.

In Paris, shares of Carrefour SA gave up 2.1% after Exane BNP Paribas cut the supermarket chain to underperform from neutral.

Outside the major indexes, shares of Novartis AG dropped 2.6% after the pharma firm's first-quarter profit narrowly missed analyst expectations.

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