* Asian stock markets: https://tmsnrt.rs/2zpUAr4
* USTR files paperwork to raise tariffs, Beijing vows retaliation
* Two-day trade talks resume in Washington on Thursday
* Ten-year Treasury yields up after touching lowest since Apr 1
* Sterling falls on report Brexit talks near collapse
By Tomo Uetake
SYDNEY, May 9 (Reuters) - Asian shares fell to six-week lows on Thursday as tensions rose ahead of last ditch U.S.-China trade talks which could sharply alter the direction of the global economy.
Investors were on tenterhooks as they waited to see if Chinese Vice Premier Liu He can salvage a trade deal during two days of negotiations in Washington on Thursday and Friday, after U.S. officials said Beijing had backtracked on earlier commitments.
An agreement could avert a sharp increase in U.S. tariffs on Chinese goods that President Donald Trump has threatened to impose on Friday, which Beijing has threatened to retaliate against in what would be major escalations in the countries' bruising trade war. Trump's threat becomes reality, it will be a game changer for the global economy. This is the worst-case scenario we modeled last year that resulted in recession conditions in the United States, a rapid reduction of growth in China, and slower global trade," said Steve Cochrane, chief APAC economist at Moody's Analytics in Singapore.
MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS dropped 1 percent to its lowest level since March 28.
Stocks extended earlier losses in Asian trade after U.S. President Donald Trump told a rally of supporters that China had "broke the deal" and would be paying for it. shares tumbled further and were a hair away from 2-1/2-month lows marked on Wednesday. The benchmark Shanghai Composite .SSEC slid 1.1 percent and the blue-chip CSI 300 .CSI300 fell 1.5 percent. Hong Kong's Hang Seng .HSI was down 1.6 percent.
Japan's Nikkei average .N225 shed 1.2 percent to a five-week low, while South Korea's KOSPI .KS11 fell 1.1 percent and the Australian benchmark .AXJO added 0.4 percent.
Trump has threatened to raise tariffs to 25 percent from 10 percent on $200 billion worth of Chinese imports at 12:01 a.m. ET (0401GMT) on Friday. Beijing has vowed to retaliate, without giving details. Fuji, senior fellow at RIETI, a Japanese government affiliated think-tank, said the talks are looking fragile.
"I would suspect the U.S. will just hand China an ultimatum. No wonder the U.S. yield curve is almost inverting again," he said.
The yield spread between three-month bills and the 10-year notes shrank to 3 basis points, compared with about 15 basis points a few weeks ago.
The closely-watched spread turned negative in late March, spooking investors, who read the development as portending a future recession.
The benchmark 10-year Treasury yield stood at 2.464 percent US10YT=RR , having hit its lowest level in five weeks of 2.426 percent on Wednesday.
Wall Street shares ended a choppy session flat to lower overnight, with the Dow Jones Industrial Average .DJI rising marginally, the S&P 500 .SPX and the Nasdaq Composite .IXIC dropping 0.2 percent and 0.3 percent, respectively. .N
In the currency market, sterling weakened on signs that Brexit talks between Britain's government and the main opposition party may soon collapse. pound fell below the psychologically key $1.30 level, touching a six-day low overnight, and last traded at $1.301 GBP=D3 .
The dollar index against a basket of six major peers .DXY was flat at 97.619, with other major currencies also confined to well-trodden ranges. The euro was little changed at $1.1188 EUR= and the Japanese yen edged up 0.2 percent against the greenback to 109.93 yen JPY= .
In the commodity market, oil prices dropped on Thursday amid concerns over the escalating Sino-U.S. trade battle, despite a surprise fall in U.S. crude stockpiles. O/R
Brent crude LCOc1 futures dropped 0.9 percent to $69.75 a barrel, while U.S. West Texas Intermediate (WTI) crude CLc1 also retreated 0.9 percent to $61.58 per barrel.
Shanghai industrial metals fell in early trade on Thursday, while benchmark London copper CMCU3 hit its lowest in nearly three months, as investors sought safety ahead of the trade talks. METL