By Ritvik Carvalho
LONDON (Reuters) - Global markets stalled on Friday after a U.S. threat to slap $500 billion of trade tariffs on China and more yuan weakness, with the dollar slipping and one major benchmark of world equities ekeing out limited gains.
U.S. President Donald Trump said in an interview with CNBC that he was prepared to impose the full raft of tariffs.
When asked about the stock market possibly falling if he took such a step, Trump said: "If it does, it does. Look, I'm not doing this for politics."
U.S. equity futures turned lower after Trump's comments, and the VIX volatility index - known as the "fear gauge" - rose to its highest level since July 11.
The MSCI All Country World Index, which tracks shares in 47 countries, was up a little over 0.1 percent, and set to end the week flat after two consecutive weekly gains.
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"While we expect the (trade) dispute to be resolved before tipping the world into recession, there is a risk that the conflict gets worse before it gets better," UBS Global Wealth Management CIO Mark Haefele wrote in a note to clients.
"As a result, we reduce the size of our overweight in global equities. We will await a reduction in trade risks, as well as monitoring growth and valuations, for signs the time is right to increase exposure again."
Asian markets were dented by a slide in the Chinese yuan to its lowest for more than a year, after the Chinese central bank set a weaker fixing for the currency for the seventh straight session.
The yuan last traded at 6.7955 to the dollar in the onshore market, after falling to 6.8128 in Asian trading. hours. Market participants attributed the currency's slight rebound to suspected intervention by state authorities.
The yuan has shed 7.6 percent of its value against the dollar since the end of the first quarter, hurt by concerns over the China-U.S. trade war and a slowing Chinese economy.
Friday's losses came a day after Trump had also said he was concerned that the "Chinese currency was dropping like a rock", he did not like rising U.S. interest rates and that the strong U.S. dollar "puts us at a disadvantage".
The dollar index, which measures the U.S. currency against a basket of peers, was down 0.1 percent on the day at 95.027.
After falling 0.4 percent, MSCI's index of Asia-Pacific shares outside Japan ended the day 0.6 percent higher as the yuan rebounded.
European markets were not immune to the jitters. The pan-European STOXX index and Germany's DAX, which is highly exposed to trade and China, were down 0.2 percent and half a percent respectively.
Europe's autos sector extended falls, down nearly 2 percent after Trump's comments and set for their biggest losses day for three weeks.
Global investors ploughed $5 billion into bonds and withdrew money from gold and European equities in the past week, as fears of a trade war encourage investors to seek safety in fixed income, Bank of America Merrill Lynch (BAML) said.
Meanwhile, political concerns in Italy returned, hitting government bonds and stocks. Reports or tensions within the coalition and an interview with a lawmarer renewed concerns about Rome's commitment to the euro.
The benchmark Italian stock index pared losses after Deputy Prime Minister Luigi Di Maio denied media reports that he had demanded Economy Minister Giovanni Tria resign unless he backed government nominees to head major companies.
"The reports out of Italy today are a reminder of just how dysfunctional the Italian government is," Daiwa Capital Markets head of economic research Chris Scicluna said. "It's not helpful that these parties are packed with euro sceptics."
The euro remained largely unchanged however, and was up 0.2 percent on the day at $1.1658.
Oil prices pared early gains on the trade worries and were on course for a third straight week of falls.
Brent crude pared an early 0.9 percent gain to be up 0.2 percent by 1145 GMT at $72.69 per barrel.
Spot gold rose 0.2 percent to $1,224.35 an ounce, having hit its lowest level for a year this week.
(Reporting by Ritvik Carvalho Additional reporting by Sujata Rao, Saikat Chatterjee and Dhara Ranasinghe; Editing by Louise Ireland)