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* U.S. tariff increase on $200 bln of Chinese goods takes effect
* China says will retaliate, does not immediately give details
* Two countries holding last-ditch trade talks in Washington
WASHINGTON/BEIJING, May 10 (Reuters) - The United States escalated a tariff war with China on Friday by hiking levies to 25% for $200 billion worth of Chinese goods in the midst of last-ditch talks to rescue a trade deal.
But even as Beijing threatened retaliation, negotiators in Washington agreed to stay at the table for a second day, keeping alive hopes of an eventual agreement.
U.S. President Donald Trump, who has adopted protectionist policies as part of his "America First" agenda, issued orders for the tariff increase, saying China had "broke the deal" by reneging on commitments made during months of negotiations.
Trump also said he would start the "paperwork" on Friday for 25% duties on another $325 billion in Chinese imports.
In Beijing, China's Commerce Ministry said it "deeply regrets" the U.S. decision, adding that it would take necessary countermeasures, without elaborating.
Chinese Vice Premier Liu He, U.S. Trade Representative Robert Lighthizer and U.S. Treasury Secretary Steven Mnuchin talked for 90 minutes on Thursday and were expected to resume efforts on Friday to rescue a deal that could end a 10-month trade war between the world's two largest economies.
The Commerce Ministry said negotiations were continuing, and that it "hopes the United States can meet China halfway, make joint efforts, and resolve the issue through cooperation and consultation".
With negotiations in progress and no action from the Trump administration to reverse the increase, U.S. Customs and Border Protection imposed the new 25% duty on more than 5,700 categories of products leaving China after 12:01 a.m. EDT (0401 GMT) on Friday.
The Office of the U.S. Trade Representative separately said 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.
The grace period was not applied to three previous rounds of tariffs imposed last year on Chinese goods, which had much longer notice periods of at least three weeks before the duties took effect.
"This delay might create an unofficial window during which the U.S. and China can continue to negotiate," investment bank Goldman Sachs wrote in a note, adding that it was a "somewhat positive sign" that talks were continuing.
Trump gave U.S. importers less than five days notice about his decision to increase the rate on the $200 billion category of goods to 25%, which now matches the rate on a prior $50 billion category of Chinese machinery and technology goods.
U.S. stock futures fell and Asian shares pared gains after the United State went ahead with its threatened tariff hike, reflecting investors worries that a protracted trade war would hit global economic growth.
E-mini futures for U.S. S&P500 slipped, was last down 0.2% in volatile trade. MSCI's broadest index of Asia-Pacific shares outside Japan was more than 1% lower.
Chinese share markets fell on their reopen after the lunch break but quickly recovered ground, as investors took heart from the continuation of talks.
The yuan also strengthened against the dollar.
"I think the Chinese in the end will want to keep negotiations going. The question is: where do they go for retaliation?" said James Green, a senior adviser at McLarty Associates who until August was the top USTR official at the embassy in Beijing.
Green expected China to increase non-tariff barriers on U.S. companies, such as delaying regulatory approvals, as it couldn't hit the same amount of imported U.S. goods with higher tariffs.
The biggest Chinese import sector affected by the latest tariff hike is a $20 billion-plus category of internet modems, routers and other data transmission devices, followed by about $12 billion worth of printed circuit boards used in a vast array of U.S.-made products.
Furniture, lighting products, auto parts, vacuum cleaners and building materials are also high on the list of products subject to the higher duties.
Gary Shapiro, chief executive of the Consumer Technology Association said the tariffs would be paid by American consumers and businesses, not China, as Trump has claimed.
"Our industry supports more than 18 million U.S. jobs but raising tariffs will be disastrous," Shapiro said in a statement.
"The tariffs already in place have cost the American technology sector about $1 billion more a month since October. That can be life or death for small businesses and startups that can't absorb the added costs."
Economists and industry consultants have said it may take three or four months for American shoppers to feel the pinch but retailers will have little choice but to raise prices on a wide range of goods to cover the rising cost of imports before too long, according to economists and industry consultants.
Even without the trade war, China-U.S. relations have continued to deteriorate, with an uptick in tensions between the two countries over the South China Sea, Taiwan, human rights and China's plan to re-create the old Silk Road, called the Belt and Road Initiative. (Reporting by David Lawder in Washington, and Yawen Chen, Michael Martina, Ryan Woo and Ben Blanchard in Beijing; Editing by Simon Cameron-Moore)