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EMERGING MARKETS-Trade tensions roil FX, stocks; Turkish lira hit by 'flash crash'

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* Turkish lira still down after 'flash crash' overnight

EM stocks set to for biggest one-day fall in 3 weeks

* Indian stocks buck the trend on stimulus boost

By Sruthi Shankar

August 26 (Reuters) - Currencies of China, Turkey and India were among the worst hit on Monday, as investors dumped risky, emerging market assets on fears an escalation in the U.S.-China trade war will inflict further damage on global growth.

China's yuan dropped 0.7% to 7.14 per dollar in onshore trading - it's weakest level since February 2008 - and fell to a record low in offshore trading following threats by both sides last week to slap tariffs on each other's goods.

The Turkish lira tumbled, hitting 6.47 per dollar at one point, in what traders said was a "flash crash" as investors cut risk exposure and briefly boosted the yen against the lira. The yen is seen as a safe-haven asset, which investors buy during times of economic uncertainty.

The lira was last down about 0.8%, trading at 5.80 per dollar, its weakest level in two months after bouts of selling on economic and political worries made it one of the worst performing emerging currencies this year.

The MSCI index of EM currencies, however, clawed back some losses after President Donald Trump said he believed China wanted to make a trade deal after contacting U.S. trade officials overnight to say it wanted to return to the negotiating table.

The index was down 0.6%, while its equities counterpart , which came off its early lows, was down 1.3% and on course for its biggest one-day percentage drop in three weeks.

"It's going to be a roller coaster from here and we have to watch whether China confirms these stories," said Jakob Christensen, chief analyst and head of EM research, Danske Bank.

"Clearly, market visibility is very low at the moment. It's hard to say when these negotiations are going to move and where it's heading."

While some Asian currencies such as the Indian rupee and the Korean won remained under pressure, Russia's rouble edged 0.2% up even as new U.S. sanctions linked to the poisoning of a former Russian double agent, Sergei Skripal, and his daughter Yulia, came into force.

South Africa's rand held steady, while the Polish zloty made gains versus the euro after a local daily reported the government planned to move its budget out of deficit in 2020 for the first time in 30 years.

India's stock markets were a bright spot, jumping nearly 2% as investors cheered the government's decision to withdraw a recent tax surcharge on foreign investors and speed up a $10 billion capital infusion into state-run banks.

Finance Minister Nirmala Sitharaman last week outlined a raft of measures in an attempt to lift consumer sentiment and promised actions to revive slowing economic growth.

A recovery in oil prices helped Russia's main stock index up 0.4%, while the broader markets remained under pressure.

For GRAPHIC on emerging market FX performance 2019, see http://tmsnrt.rs/2egbfVh For GRAPHIC on MSCI emerging index performance 2019, see https://tmsnrt.rs/2OusNdX

For TOP NEWS across emerging markets

For CENTRAL EUROPE market report, see

For TURKISH market report, see

For RUSSIAN market report, see (Reporting by Sruthi Shankar in Bengaluru; editing by Emelia Sithole-Matarise)