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(Adds reaction, background on trade dispute; updates markets)
* U.S. tariff increase on Chinese goods takes effect
* China to retaliate, no details yet
* U.S., Chinese officials end second day of negotiations
* Trump calls discussions constructive
WASHINGTON, May 10 (Reuters) - U.S. President Donald Trump said on Friday that trade talks with China would continue even after Washington moved to hike tariffs on Chinese goods, avoiding the worst-case scenario of a complete breakdown in negotiations between the world's two largest economies.
Trump's remarks, which were made in a tweet, followed the end of talks in Washington between U.S. Trade Representative Robert Lighthizer, U.S. Treasury Secretary Steven Mnuchin and Chinese Vice Premier Liu He.
"Over the course of the past two days, the United States and China have held candid and constructive conversations on the status of the trade relationship between both countries," Trump said, praising his relationship with Chinese President Xi Jinping and saying the negotiations would carry on.
"In the meantime, the United States has imposed Tariffs on China, which may or may not be removed depending on what happens with respect to future negotiations!" Trump said.
Major U.S. stock indexes, which had fallen sharply through the week as investors worried that the 10-month-old trade war could spiral out of control, reversed course to close higher on Friday after Mnuchin said the trade talks were "constructive." Yields on U.S. government debt also drifted higher after the end of the talks.
Earlier on Friday, the United States increased its tariffs on $200 billion of Chinese goods to 25% from 10%. China has said it will retaliate.
In earlier tweets, Trump defended the tariff hike and said he was in "absolutely no rush" to finalize a deal, adding that the U.S. economy would gain more from the levies than any agreement.
Despite his insistence that China will absorb the cost of the tariffs, it's U.S. businesses that will pay them and likely pass them on to consumers. Consumer spending accounts for more than two-thirds of U.S. economic activity.
It may take three or four months for American shoppers to feel the pinch, but retailers will have little choice but to raise prices to cover the rising cost of imports before too long, economists and industry consultants say.
The Business Roundtable, a group of U.S. corporate chief executive officers, said it was concerned rising tariffs would damage the American economy, though it said it supported U.S. efforts to resolve structural trade issues with China.
Trump, who has adopted protectionist policies as part of his "America First" agenda and railed against China for trade practices he labels unfair, has accused Beijing of reneging on commitments it made during months of negotiations.
Following the U.S. tariff hike, China's Commerce Ministry said it would take countermeasures but did not elaborate. China responded to Trump's tariffs last year with levies on a range of U.S. goods including soybeans and pork.
U.S. Agriculture Secretary Sonny Perdue said on Friday that Trump had asked him to create a plan to support American farmers. The U.S. government already has rolled out up to $12 billion to help offset their China-related losses.
"THREAT TO WORLD GROWTH"
The new 25% U.S. duty is being imposed on more than 5,700 categories of products, applied to products leaving China after 12:01 a.m. EDT (0401 GMT) on Friday. The biggest sector affected is a $20 billion-plus category of internet modems, routers and other data transmission devices. Printed circuit boards, furniture, lighting products, auto parts, vacuum cleaners and building materials also are high on the list.
Seaborne cargoes shipped from China before midnight were not subject to the new tax as long as they arrive in the United States prior to June 1. Those cargoes will be charged the original 10% rate.
Trump gave U.S. importers less than five days notice about his decision to increase the rate on $200 billion worth of goods, which now matches the rate on a prior $50 billion category of Chinese machinery and technology goods.
The higher tariffs could reduce U.S. gross domestic product by 0.3% and China's by 0.8% in 2020, consultancy Oxford Economics said.
Trump has said he may put new tariffs on another $325 billion in Chinese imports, which could severely disrupt global supply lines and derail an already-slowing world economy.
"There is no greater threat to world growth," French Finance Minister Bruno Le Maire said.
Although Trump has maintained that his trade policies will boost U.S. manufacturing, some in the sector are concerned that the policies could backfire if the dispute with China is not resolved soon.
"We were mildly excited yesterday when we thought this was the end game," said Michael Haberman, president of Gradall Industries Inc in New Philadelphia, Ohio, which sells about 5% of its machinery to China. "For us, the longer this continues the more dangerous it becomes."
(Reporting by Jeff Mason and Humeyra Pamuk Additional reporting by Susan Heavey, David Lawder, Eric Beech and Alexandra Alper in Washington, Tim Aeppel in New York, Yawen Chen, Michael Martina, Ryan Woo, Ben Blanchard and Kevin Yao in Beijing, and Xihao Jiang in Shanghai Writing by Paul Simao; Editing by Rosalba O'Brien and Leslie Adler)