(Updates prices, changes comments, dateline from previous LONDON)
* U.S. data drags crude prices lower
* U.S. stocks off their lows; Europe edges up
* Steel stocks rally on Wall Street
NEW YORK, March 7 (Reuters) - A key gauge of world stock markets slipped on Wednesday after a strong advocate of free trade resigned from the White House, fanning fears that U.S. President Donald Trump will proceed with protectionist tariffs and risk a global trade war.
But the U.S. dollar recovered most of its overnight losses as some investors wagered that even with the departure of Trump's chief economic adviser Gary Cohn, the president's hard talk could still be a tactic amid ongoing trade negotiations with Canada and Mexico.
MSCI's gauge of stocks across the globe shed 0.52 percent, while the pan-European FTSEurofirst 300 index rose 0.33 percent.
Cohn had resigned on Tuesday, but he and the president had been discussing his possible departure for weeks, a White House official said.
"In the eyes of the market, (Cohn) was viewed as the adult in the room on many items," said Gene Tannuzzo, senior portfolio manager at Columbia Threadneedle Investments in Minneapolis.
"This should create a greater risk premium in the currency markets for countries that depend heavily on the U.S. for trade. Not surprisingly, the Canadian dollar and Mexican peso are much weaker this morning."
Against the greenback, the Mexican peso lost 0.36 percent to 18.81 and the Canadian dollar fell 0.90 percent to 1.30 per dollar.
However, the overall outlook for the U.S. currency is not upbeat. Goldman Sachs analysts said in a Wednesday note that tariffs similar to those proposed by Trump have usually been associated with subsequent currency weakness.
"We therefore see the latest news as an additional reason to remain cautious on the outlook for the broad Dollar," according to Goldman's note.
The dollar index, tracking it against a basket of major currencies, rose 0.1 percent, with the euro down 0.06 percent to $1.2395.
The Japanese yen strengthened 0.18 percent versus the greenback at 105.96 per dollar, while sterling was last trading at $1.3887, up 0.01 percent on the day.
OIL, GOLD DROP
Steel sector stocks rose sharply on Wall Street, but not enough to keep the major U.S. indexes afloat on lingering concern that a protracted trade war would weaken the U.S. and global economies.
The losses, however, were smaller than what futures had indicated overnight in an initial reaction to Cohn's exit.
I suspect that its still a fluid situation," said Jason Ware, chief investment officer at Albion Financial in Utah.
He said with Trump keeping a close eye on stock indexes, the selling that is preceded by tariff and trade war talks could change the president's mind.
"Indeed, here is a president who judges his success by using the stock market as an important barometer for that. So if the market votes an overwhelming vote of no confidence on these tariffs, is there a chance that things change next week? Could be."
The Dow Jones Industrial Average fell 276.91 points, or 1.11 percent, to 24,607.21, the S&P 500 lost 19.67 points, or 0.72 percent, to 2,708.45 and the Nasdaq Composite dropped 34.90 points, or 0.47 percent, to 7,337.10.
Equities got a bid after White House trade adviser Peter Navarro, who favors strong tariffs, said in a Bloomberg interview he was not a candidate to replace Cohn.
"The market's gone up on that," said Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey.
"The market sees him (Navarro) as a very protectionist type. If he's not in the running, the market seems to like that."
European car makers, were up 0.6 percent after earlier dropping more than 1 percent on the risk of a hike in import tariffs to the United States.
Emerging market stocks lost 0.64 percent. MSCI's broadest index of Asia-Pacific shares outside Japan closed 0.74 percent lower, while Japan's Nikkei lost 0.77 percent.
Oil prices fell after U.S. government data showed an increase in inventories, with Washington's plans for import tariffs weighing further on investor sentiment.
U.S. crude fell 2.41 percent to $61.09 per barrel and Brent was last at $64.32, down 2.23 percent on the day.
Benchmark 10-year notes last rose 5/32 in price to yield 2.8607 percent, from 2.877 percent late on Tuesday.
The 30-year bond last rose 1/32 in price to yield 3.1349 percent, from 3.136 percent late on Tuesday.
Spot gold dropped 0.7 percent to $1,324.47 an ounce. U.S. gold futures fell 0.74 percent to $1,325.30 an ounce.
Copper lost 0.99 percent to $6,934.50 a tonne.
(Additional reporting by Sinead Carew, Megan Davies and Kate Duguid; Editing by Bernadette Baum)