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GLOBAL MARKETS-Asia shares sink to 6-week low as clock ticks toward U.S. tariff hike on Chinese goods

Tomo Uetake

tariff hike on Chinese goods@

* Asian stock markets: https://tmsnrt.rs/2zpUAr4

* USTR files paperwork to raise tariffs, Beijing vows retaliation

* Two-day trade talks resume in Washington on Thursday

* Ten-year Treasury yields up after touching lowest since Apr 1

* Sterling falls on report Brexit talks near collapse

SYDNEY, May 9 (Reuters) - Asian shares fell to six-week lows on Thursday as tensions rose ahead of last ditch U.S.-China trade talks which could sharply alter the direction of the global economy.

Investors were on tenterhooks as they waited to see if Chinese Vice Premier Liu He can salvage a trade deal during two days of negotiations in Washington on Thursday and Friday, after U.S. officials said Beijing had backtracked on earlier commitments.

An agreement could avert a sharp increase in U.S. tariffs on Chinese goods that President Donald Trump has threatened to impose on Friday, which Beijing has threatened to retaliate against in what would be major escalations in the countries' bruising trade war.

"If Trump's threat becomes reality, it will be a game changer for the global economy. This is the worst-case scenario we modeled last year that resulted in recession conditions in the United States, a rapid reduction of growth in China, and slower global trade," said Steve Cochrane, chief APAC economist at Moody's Analytics in Singapore.

MSCI's broadest index of Asia-Pacific shares outside Japan dropped 1 percent to its lowest level since March 28.

Stocks extended earlier losses in Asian trade after U.S. President Donald Trump told a rally of supporters that China had "broke the deal" and would be paying for it.

Chinese shares tumbled further and were a hair away from 2-1/2-month lows marked on Wednesday. The benchmark Shanghai Composite slid 1.1 percent and the blue-chip CSI 300 fell 1.5 percent. Hong Kong's Hang Seng was down 1.6 percent.

Japan's Nikkei average shed 1.2 percent to a five-week low, while South Korea's KOSPI fell 1.1 percent and the Australian benchmark added 0.4 percent.

Trump has threatened to raise tariffs to 25 percent from 10 percent on $200 billion worth of Chinese imports at 12:01 a.m. ET (0401GMT) on Friday. Beijing has vowed to retaliate, without giving details.

Kazuhiko Fuji, senior fellow at RIETI, a Japanese government affiliated think-tank, said the talks are looking fragile.

"I would suspect the U.S. will just hand China an ultimatum. No wonder the U.S. yield curve is almost inverting again," he said.

The yield spread between three-month bills and the 10-year notes shrank to 3 basis points, compared with about 15 basis points a few weeks ago.

The closely-watched spread turned negative in late March, spooking investors, who read the development as portending a future recession.

The benchmark 10-year Treasury yield stood at 2.464 percent , having hit its lowest level in five weeks of 2.426 percent on Wednesday.

Wall Street shares ended a choppy session flat to lower overnight, with the Dow Jones Industrial Average rising marginally, the S&P 500 and the Nasdaq Composite dropping 0.2 percent and 0.3 percent, respectively.

In the currency market, sterling weakened on signs that Brexit talks between Britain's government and the main opposition party may soon collapse.

The pound fell below the psychologically key $1.30 level, touching a six-day low overnight, and last traded at $1.301 .

The dollar index against a basket of six major peers was flat at 97.619, with other major currencies also confined to well-trodden ranges. The euro was little changed at $1.1188 and the Japanese yen edged up 0.2 percent against the greenback to 109.93 yen.

In the commodity market, oil prices dropped on Thursday amid concerns over the escalating Sino-U.S. trade battle, despite a surprise fall in U.S. crude stockpiles.

Brent crude futures dropped 0.9 percent to $69.75 a barrel, while U.S. West Texas Intermediate (WTI) crude also retreated 0.9 percent to $61.58 per barrel.

Shanghai industrial metals fell in early trade on Thursday, while benchmark London copper hit its lowest in nearly three months, as investors sought safety ahead of the trade talks. (Reporting by Tomo Uetake in Sydney, Additional reporting by Hideyuki Sano in Tokyo; Editing by Sam Holmes & Kim Coghill)