* Trump's tariff on steel and aluminium raises trade warfears
* U.S. debt yields fall as trade worries dwarf inflationjitters
* U.S. junk bonds post largest fall since Nov 2016
By Hideyuki Sano
TOKYO, March 2 (Reuters) - Stock markets in Asia on Fridayextended a Wall Street rout, as investors were spooked by thespectre of a global trade war after President Donald Trumpannounced the United States would impose hefty tariffs on steeland aluminium imports.
Trump said duties of 25 percent on steel and 10 percent onaluminium would be formally announced next week, sparkingconcerns of retaliatory moves from major trade partners likeChina, Europe and neighbouring Canada in a blow to the globaleconomy. world stands on the brink of a trade war as DonaldTrump announces severe tariffs on steel and aluminium - forgetthe yield curve - this is how recessions start," said RobertCarnell, head of research, Asia-Pacific at ING In Singapore.
"Trade is just about the only thing economists are agreed on- more is better."
MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS dropped 1.1 percent, led by a fall in SouthKorean shares while Japan's Nikkei .N225 tumbled 2.9 percent.
For the week, they are down 2.3 percent and 3.6 percentrespectively.
Asian steelmaker shares dropped, with South Korea's Posco 005490.KS falling 3 percent and Japan's Nippon Steel 5401.T 4 percent.
Toyota Motor 7203.T shares were down 2.4 percent as theautomaker said the planned tariffs would substantially raisecosts and therefore prices of cars and trucks sold in America. Chinese shares recouped some of the opening losses, with the Shanghai composite index .SSEC down just 0.4percent.
On Wall Street, the S&P 500 .SPX lost 36.16 points, or1.33 percent, to 2,677.67 on Thursday, coming a day after investors sold off heavily on worries the Federal Reserve mightincrease rates more than expected this year.
Trump's latest trade salvo comes after Washington slappedsteep tariffs on imports of solar panels and washing machines inJanuary, prompting China to launch an anti-dumping andanti-subsidy investigation into imports of sorghum from theUnited States. anxiety over tit-for-tat moves was underscored byCanada's quick response, with officials in Ottawa saying theywill retaliate against any U.S. tariffs on steel and aluminiumproducts. markets fretting about the pace of U.S. rate hikes thisyear, the worry is that escalating trade protectionism woulddent world growth and corporate earning, key drivers of a rallyin equities last year.
The concerns of a harmful trade war eclipsed the upbeat U.S.economic data published on Thursday, including a rise in themanufacturing index to 14-year highs and another showing thenumber of Americans filing for unemployment benefits hitting a48-year low. inflation picked up as the PCE price index, a gauge ofunderlying inflation, advanced 0.3 percent in January - thelargest gain since January 2017. On the year, it posted anincrease of 1.5 percent, in line with the previous two months.
"Even if you manufacture goods, if someone doesn't buy them,you have to scale back your production, leading to slowdown inglobal economic activities," said Daisuke Uno, chief strategistat Sumitomo Mitsui Bank.
"I would expect markets entered another period ofcorrection," he added.
U.S. Treasury yields fell as the risk of a trade warappeared to push aside considerations of inflation, a majortheme that spooked global financial markets earlier this year.
The 10-year U.S. Treasuries yield US10YT=RR fell to 2.811percent, hitting its lowest level in three weeks and furtherextending the distance from its four-year peak of 2.957 percenttouched on Feb 21.
Some say, on the other hand, markets may be over-reacting.
"Trump has been repeatedly boasting about rise in shareprices. If this is going to lead to a sustained drop in sharpprices, I bet he is likely to change his stance," said NobuyukiKashihara, head of research at Asset Management One.
In the currency market, the dollar's rebound following the bullish comments on the U.S. economy from new Federal ReserveChair Jerome Powell on Tuesday lost steam.
The euro EUR= jumped back to $1.2271, after having hit aseven-week low of $1.21545 on Thursday.
The dollar slipped to 106.14 yen JPY= , edging back towardsits 15-month low of 105.545 set on Feb 16.
The dollar index is still down 2.1 percent this year, doggedby suspicions that the Trump administration prefers a weakerdollar to mend its bulging trade deficit. Worries that Trump'sbig tax cuts and spending plans will ramp up fiscal deficits tothe extent that they undermine confidence in U.S. debt have alsohurt the greenback.
Oil prices were also under pressure, having fallen more thanone percent the previous day on the trade spat concerns.
U.S. crude CLc1 traded at $61.19 per barrel, up 0.4percent in Asia on Friday after having fallen to two-week low of$60.18 on Thursday. It is down 3.7 percent so far this week.
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