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GLOBAL MARKETS-Trade war concerns flatten yields, roil stocks

* U.S. yield curve flattens on soft data, Washington shakeup

* Wall Street slips as industrials lag

* Trade war threat drives demand for high-grade euro zone bonds (Updates with U.S. trading; changes byline and dateline)

NEW YORK, March 14 (Reuters) - Simmering fears of a global trade war on Wednesday overshadowed robust data from China and kept government bond yields low in the U.S. and Europe, with U.S. stocks sinking into the red amid a drop in industrial shares.

U.S. President Donald Trump on Tuesday fired Secretary of State Rex Tillerson, seen as a free-trade proponent, replacing him with the more hawkish former Central Intelligence Agency Director Mike Pompeo.

Later on Tuesday, Reuters reported that the U.S. was seeking to impose tariffs on up to $60 billion of Chinese imports.

The news contributed to a continued flattening on Wednesday of the U.S. yield curve, a move also aided by a third consecutive monthly decrease in retail sales data.

The spread between five-year notes and 30-year bonds, an indicator of the shape of the yield curve, lowered to 44.9 basis points on Wednesday, 3 basis points below its last close.

Benchmark 10-year notes last rose 11/32 in price to yield 2.8079 percent, from 2.848 percent late on Tuesday.

"Long-term, continuing rate hikes will keep the flattening going," said Michael Cloherty, head of U.S. rates strategy at RBC Securities in New York, though in the short-term, he said, "we're a little flatter than we should be."

In Europe, high-rated government bond yields edged higher but remained near recent lows. German 10-year government bond yields seesawed in midday trades, falling to a one-and-a-half-month low at 11:25 a.m. ET.

GROWTH

Positive news from China spurred higher openings on Wall Street, but the main stock indexes could not weather political fears as trading wore on.

China reported industrial output expanding at a surprisingly faster pace at the start of the year. Fixed asset investment also beat forecasts, while retail sales improved.

That came on the heels of consumer price data on Tuesday that pointed to annual U.S. core inflation steady at 1.8 percent, cementing investors' expectations that the Federal Reserve would not raise rates more than three times in 2018.

But dips in industrial stocks, including a 4.4 percent drop in shares of Boeing sent U.S. stocks reeling in morning trading.

The Dow Jones Industrial Average fell 240.62 points, or 0.96 percent, to 24,766.41, the S&P 500 lost 11.3 points, or 0.41 percent, to 2,754.01 and the Nasdaq Composite dropped 20.44 points, or 0.27 percent, to 7,490.58.

"The market is still trying to weigh concerns about tariffs on one hand and understanding how the President acts and how he speaks openly and comes up with a different policy in the end," said Robert Pavlik, chief investment strategist at SlateStone Wealth.

The pan-European FTSEurofirst 300 index lost 0.10 percent and MSCI's gauge of stocks across the globe shed 0.39 percent.

Emerging market stocks lost 0.49 percent. MSCI's broadest index of Asia-Pacific shares outside Japan closed 0.34 percent lower, while Japan's Nikkei lost 0.87 percent.

The Chinese data spurred an early spike for oil, before prices dropped later.

U.S. crude fell 0.36 percent to $60.49 per barrel and Brent was last at $64.50, down 0.22 percent on the day.

In currencies, the dollar index rose 0.18 percent, with the euro down 0.26 percent to $1.2357.

The Japanese yen strengthened 0.38 percent versus the greenback at 106.17 per dollar, while sterling was last trading at $1.3928, down 0.22 percent on the day.

(Additional reporting by Sujata Rao, Sruthi Shankar and Kate Duguid; Editing by Bernadette Baum)