(Adds oil, gold settlements, close of European markets)
* Trump steel, aluminum tariff plan raises trade war fears
* U.S. debt yields up as trade jitters dwarf inflation fears
* Trump tweets "trade wars are good, and easy to win"
By Herbert Lash
NEW YORK, March 2 (Reuters) - World equity markets slid further and the U.S. dollar dropped to its lowest in more than two years against the yen on Friday as concern over protectionism added to investor uncertainties about rising inflation and the outlook for U.S. interest rates.
President Donald Trump's pledge on Thursday to impose hefty tariffs on steel and aluminum imports raised the prospect of a global trade war that could weaken a healthy U.S. economy that is poised to deliver record corporate earnings.
The rout in risk assets knocked the dollar from multi-week highs as the specter of protectionism spurred fear of retaliation by other nations, which would be negative for the greenback.
Canadian Prime Minister Justin Trudeau called the imposition of any U.S. steel and aluminum tariffs "absolutely unacceptable."
Major equity indices in Europe fell on Friday more than 2 percent, as markets in Europe and Asia were closed when Trump's tariff proposal was announced on Thursday. The Nikkei index fell 2.5 percent in Tokyo and the Hang Seng index fell 1.5 percent in Hong Kong.
Asian steelmakers were hit hard, with South Korea's Posco down 3.6 percent and Japan's Nippon Steel off 3.8 percent. Toyota Motor shares slid 2.4 percent after it said tariffs would substantially raise production costs and the price of cars and trucks sold in America.
Trump's move could herald the tough trade actions he had promised during the electoral campaign as a way to incentivize companies to just "buy American, hire American," said John Doyle, vice president of dealing and trading at Tempus Inc. in Washington.
"The U.S. dollar may face some scrutiny and as a result struggle to hold on to recent gains," Doyle said. "It is the type of scenario that is unprecedented, thus wild swings may occur as this is digested and analyzed the next few days."
Volatility will continue until investors get some clarity on the path of U.S. interest rates, inflation, global trade policy and the international response, said Michael Arone, chief investment strategist at State Street Global Advisors in Boston.
"Investors do not like uncertain outcomes, they just don't," Arone said. "If we could just eliminate some of this noise, there's a really healthy underlying stock market."
MSCI's gauge of stock performance in 47 countries fell 0.29 percent while the pan-European FTSEurofirst 300 index of leading regional shares lost 2.13 percent to close at 1,437.14.
The sell-off in European stocks weighed particularly on the export-oriented German DAX index, which fell 2.27 percent to a six-month low.
ArcelorMittal SA, the world's biggest steelmaker, fell 3.7 percent while euro zone automakers and parts companies fell 2.29 percent.
On Wall Street, the Dow Jones Industrial Average fell 210.36 points, or 0.85 percent, to 24,398.62. The S&P 500 lost 3.59 points, or 0.13 percent, to 2,674.08 and the Nasdaq Composite added 25.30 points, or 0.35 percent, to 7,205.87.
The dollar index fell 0.41 percent, with the euro up 0.49 percent to $1.2327. The Japanese yen firmed 0.66 percent versus the greenback at 105.56 per dollar.
The Mexican peso lost 0.13 percent to 18.86, while the Canadian dollar fell 0.43 percent versus the greenback at 1.29.
U.S. Treasury yields rose, with the 10-year yield bouncing back from a three-week low as the Bank of Japan's chief hinted at a possible exit from its ultra-easy policies if inflation hits its target in its fiscal 2019.
Benchmark 10-year notes fell 14/32 in price to push its yield up 2.8552 percent.
Germany's benchmark 10-year Bund yield dropped as low as 0.606 - its lowest since late January - before inching up to 0.648 percent.
Oil prices rose as Wall Street stocks bounced off session lows, but crude benchmarks declined for the first time in three weeks on fears U.S. plans to impose tariffs on steel and aluminium could squeeze economic growth, and as U.S. crude inventories climbed.
U.S. crude rose 26 cents to settle at $61.25 per barrel and Brent settled up 54 cents at $64.37 per barrel.
Reporting by Herbert Lash, additional reporting by Richard Leong in New York Editing by Bernadette Baum and Diane Craft