* European stocks dip on security worries
* Dollar steadies against yen after U.S./Japan trade talks
* France/Germany bond yield gap tightens before vote
* Oil falls on rising U.S. shale output
* Graphic: World FX rates in 2017 http://tmsnrt.rs/2egbfVh
By Nigel Stephenson
LONDON, April 18 (Reuters) - European shares fell and the dollar dipped against the yen on Tuesday as tensions over North Korea and the coming weekend's knife-edge presidential election in France kept investors nervous.
Low-risk government debt, a favoured investment in uncertain times, was in demand, while gold held firm close to five-month highs touched on Monday, the day after a failed ballistic missiles test by Pyongyang.
Turkey's lira rose against the dollar after Turkish President Tayyip Erdogan rejected Western criticism of a referendum in which he won sweeping new powers. market activity reduced in the past week due to Easter holidays, investors have focused on political factors that also include Syria and U.S. relations with Russia and China.
European shares fell on their first day of trading since the break. The pan-European STOXX 600 index .STOXX , which hit 16-month highs last week, was down 0.6 percent, led lower by the basic resources .SXPP and oil and gas sectors .SXEP as commodity prices dropped.
MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS dropped 0.7 percent, while Tokyo's Nikkei .N225 closed up 0.4 percent on earlier yen weakness.
The dollar dipped fractionally against a basket of major currencies .DXY . It earlier lifted off five-month lows versus the yen after U.S. Treasury Secretary Steven Mnuchin told the Financial Times a strong dollar was a positive in the long term while agreeing with U.S. President Donald Trump that it hurt exports in the short term. greenback traded at 108.88 yen JPY= , down less than 0.1 percent on the day, while the euro was 0.1 percent stronger at $1.0649 EUR= .
Investors were also watching trade talks between the United States and Japan, whose deputy premier, Taro Aso, said the two sides agreed to combat unfair trade practices.
"There was quite strong thinking in the market that the U.S. would maybe put pressure on Japan in terms of currency manipulation," said Neil Jones, head of hedge fund FX sales at Mizuho in London.
FRENCH FOREBODING
Investor nervousness ahead of Sunday's French election made itself felt in currency and debt markets. French 10-year government bond yields FR10YT=TWEB initially rose while ultra-safe German equivalents DE10YT=TWEB dipped, taking the gap between the two close to six-week highs.
But French yields later fell and the spread with Germany narrowed to its tightest since April 13 after an opinion poll put centrist Emmanuel Macron first in the first round of voting, just ahead of far-right, anti-euro candidate Marine Le Pen with a bigger gap to far-left representative Jean-Luc Melenchon.
The cost of hedging against big moves in the euro against both the dollar and the yen over the next month jumped on Monday to their highest levels since Britain's vote to leave the European Union EUR1MO= EURJPY1MO= .
"(Euro government bond) investors are going to be very careful this week and clearly the only thing that's going to be on their minds is what happens in France," said Chris Scicluna, head of economic research at Daiwa Capital Markets.
Implied volatility in the STOXX 600 index hit its highest since early November 2016 .V2TX .
Turkey's lira TRY= strengthened 0.4 percent to 3.69 per dollar after Erdogan's narrow victory in Sunday's referendum.
"The markets are taking this initial result as positive insofar the buck now stops with one person and in theory political noise should come down," Greg Saichin, CIO emerging markets fixed income at Allianz (DE:ALVG) Global Investors said, adding that the next battleground will be the 2019 election.
Oil prices fell after a U.S. government report indicated U.S. shale production was rising. Brent, the international benchmark crude, fell 29 cents a barrel to $55.07.
Copper was down 0.6 percent at $$5,655 a tonne CMCU3
Gold XAU= was marginally higher on the day at $1,283 an ounce, having touched a five-month high of $1,295 on Monday.
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