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GLOBAL MARKETS-Asian shares fall to 3-1/2 month low as trade war escalates

Andrew Galbraith

* MSCI Asia ex-Japan -0.9%, hits lowest since Jan 30

* Nikkei -0.8%, touches more than 3-month low

* China shares down at midday in volatile trade

* U.S. stock futures higher, yen lower following Trump comments

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

SHANGHAI, May 14 (Reuters) - Fresh U.S.-China tariff war volleys pressured Asian shares on Tuesday, but comments from U.S. President Donald Trump that he expects trade negotiations to be successful aided sentiment.

Chinese markets that were pummelled in early trade trimmed losses amid signs of state support.

China on Monday announced it would impose higher tariffs on $60 billion of U.S. goods following Washington's decision last week to hike its own levies on $200 billion in Chinese imports.

MSCI's broadest index of Asia-Pacific shares outside Japan was down 0.9% as volatile Chinese markets paused for their midday break. The index had earlier fallen as much as 1.25% to its lowest since Jan. 30.

Providing some support for Asian markets were comments from Trump late on Monday that trade talks with China are "going to be very successful". That helped lift U.S. stock futures more than 0.5%, though sentiment remained fragile.

Prakash Sakpal, Asia economist at ING in Singapore, said Monday's volatility showed how a "180-degree" turn in U.S. rhetoric on trade negotiations had spooked markets.

"We don't see any quick end to this state of the markets until we see some resolution, constructive dialogue and something very solid in terms of deals. But the hopes for that are a bit misplaced currently," he said.

Broader Asian markets were dragged lower by sagging Chinese shares, with the MSCI China index dropping 1.6%. China's blue-chip CSI300 index swung between losses and gains amid signs of possible state support, before finishing the morning session down 0.2%.

"Politicians may be willing to focus less on the market impact until things get more severe, making it doubtful there will be an early resolution to the current breakdown in negotiations simply based on market moves," said Kerry Craig, global market strategist at J.P. Morgan Asset Management.

"Furthermore, as there isn't a clear schedule for meetings between Chinese and U.S. negotiators, markets are likely to be more volatile."

Australian shares lost 0.9% while Japan's Nikkei stock index slid 0.8%, touching its lowest since mid-February.

The U.S. Trade Representative's office on Monday said it planned to hold a public hearing next month on the possibility of imposing duties of up to 25% on a further $300 billion worth of imports from China.

The tariff escalation has rattled global markets, even as Trump said he would meet with Chinese President Xi Jinping next month.

On Monday, the Dow Jones Industrial Average fell 2.38% to 25,324.99, the S&P 500 lost 2.41% to 2,811.87 and the Nasdaq Composite dropped 3.41% to 7,647.02.

As investors flocked to safe-haven assets, U.S. Treasury yields remained near six-week lows early on Tuesday, though they moved higher following Trump's comments. Benchmark 10-year Treasury notes last yielded 2.4157% compared with a U.S. close of 2.405% on Monday.

The two-year yield, which rises with traders' expectations of higher Fed fund rates, ticked up to 2.1945% from a U.S. close of 2.193%. But data from CME Group continued to show a more than 70% chance of the Fed cutting rates by the end of 2019.

After an earlier inversion, U.S. 10-year yields moved higher than those on three-month Treasury bills. A sustained inversion of this part of the yield curve has preceded every U.S. recession in the past 50 years.

On Monday, some traders were concerned that China, the largest foreign U.S. creditor, could dump Treasuries to counter the Trump administration's hardening trade stance. But most analysts downplayed such a possibility.

"If China did start to (sell Treasuries) it will galvanise both sides of politics in the U.S. against China and the Fed would be sent into the market to buy bonds," Greg McKenna, strategist at McKenna Macro said in a note to clients.

"That would expand its balance sheet but it would allow it to neutralise China's efforts to disturb U.S. financial markets. So I doubt they'll try to sell Treasuries."

After earlier falling against the yen, the dollar strengthened 0.25% against the Japanese currency to 109.57 .

The single currency was up about 0.1% on the day at $1.1238, while the dollar index, which tracks the greenback against a basket of six major rivals, was nearly unchanged at 97.313.

China's offshore yuan hit a fresh 2019 low early in Asia on Tuesday before rebounding. It was last trading at 6.8933 per dollar, up 0.28% on the day.

Its onshore counterpart strengthened to 6.8733 per dollar after touching four-month lows on Monday, sparking speculation China's central bank may be letting the currency weaken amid the intensifying trade war.

Oil prices edged higher, buoyed by Middle East tensions though gains were checked by trade war concerns. Saudi Arabia said two of its oil tankers were among those attacked off the coast of the United Arab Emirates, describing it as an attempt to undermine security of supply amid United States-Iran tensions.

U.S. crude was 0.33% higher at $61.24 per barrel while Brent crude gained 0.36% to $70.48 per barrel.

Elsewhere, gold gave up gains after earlier rising amid broader market jitters. Spot gold was flat at $1,299.35 per ounce. Bitcoin gained 2.2% to $7,984.11. (Additional reporting by Richard Leong in NEW YORK; Editing by Sam Holmes and Jacqueline Wong)