UPDATE 2-European stocks close higher on Wall St, airlines bounce

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* Airlines gain on short squeeze in AAL

* EU warns it could block vaccine exports

* Spike in volatility hits equities
(Updates to market close)

By Sruthi Shankar and Joice Alves

Jan 28 (Reuters) - European stocks closed higher on Thursday
as a bounce in Wall Street stocks, gains in airlines and upbeat
earnings reports drove a reversal of early losses across
markets.

After falling as much as 2% in morning trade, the
pan-European STOXX 600 rose 0.1% by the close, leaving
the benchmark with small gains for the year.

The German DAX gained 0.3%, France's CAC 40
was up 0.9% and Britain's exporter-heavy FTSE fell 0.6%,
coming under pressure from a rise in the pound.

Stocks globally saw a spike in volatility this week as a
retail trading frenzy hit markets in the United States, Europe
and Asia, inflating value in certain stocks that major hedge
funds have bet against.

Wall Street jumped on gains in technology stocks, while
American Airlines surged more than 20% at one point
after the U.S. carrier was mentioned on Reddit's WallStreetBets
forum following its results.

European travel names like Lufthansa, TUI
and British Airways-owner IAG rose between 4.7% and
7.2%. Wizz Air and easyJet rose more than 4.5%
each despite posting a double-digit decline in fourth-quarter
revenue.

"UK airlines are tracking a short squeeze in American
Airlines brought on by r/WallStreetBets after it released Q4
earnings," said Jasper Lawler, head of research at LCG. "AA has
abnormally high short interest but other airlines do too given
the state the industry is in."

Other European stocks that were highly bid this week, like
CD Projekt, Ambu and Varta,
extended gains, while Nokia tumbled 13%.

Investors looked past strong earnings from Apple
and Facebook as well as the U.S. Federal Reserve's pledge
to stick to loose monetary policy as worries about slow rollout
of COVID-19 vaccines and more curbs in Europe dampened the mood.

"With valuations at levels already pricing in much of the
recovery from a pandemic that is far from over, these
corrections are always possible," Ian Williams, economics and
strategy research analyst at Peel Hunt said in a note.

Germany is preparing entry restrictions for travellers from
Britain, Brazil and South Africa, and its health minister
expects the current shortage of coronavirus vaccines to continue
well into April.

Meanwhile, the European Union warned drug companies such as
AstraZeneca that it would use all legal means or even
block exports unless they agreed to deliver shots as promised.

The world's largest spirits maker Diageo rose 3%
after it reported a surprise rise in underlying net sales growth
in the first half of the year, helped by strong U.S. demand.

Swedish medical equipment maker Getinge jumped 9%
after reporting strong quarterly results as it saw a spike in
demand in 2020 for ventilators and other advanced life support
equipment due to the pandemic.
(Reporting by Sruthi Shankar in Bengaluru and Joice Alves in
London; Editing by Arun Koyyur and Mark Heinrich)