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 .STOXX rose 0.1% by the close, leaving the benchmark with small gains for the year.

The German DAX .GDAXI gained 0.3%, France's CAC 40 .FCHI was up 0.9% and Britain's exporter-heavy FTSE .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 AAL.O surged more than 20% at one point after the U.S. carrier was mentioned on Reddit's WallStreetBets forum following its results. travel names like Lufthansa LHAG.DE , TUI TUIT.L and British Airways-owner IAG ICAG.L rose between 4.7% and 7.2%. Wizz Air WIZZ.L and easyJet EZJ.L rose more than 4.5% each despite posting a double-digit decline in fourth-quarter revenue. 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 CDR.WA , Ambu AMBUb.CO and Varta VAR1.DE , extended gains, while Nokia NOKIA.HE tumbled 13%.

Investors looked past strong earnings from Apple AAPL.O and Facebook FB.O 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 (NYSE: WMB ), 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. the European Union warned drug companies such as AstraZeneca AZN.L that it would use all legal means or even block exports unless they agreed to deliver shots as promised. world's largest spirits maker Diageo DGE.L 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. medical equipment maker Getinge GETIb.ST 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.