(Updates prices, changes comments, byline, dateline, previous LONDON)
* U.S. data drags crude prices lower
* U.S. stocks off lows; Europe edges up
* Steel stocks rally on Wall Street
By Rodrigo Campos
NEW YORK, March 7 (Reuters) - A key gauge of world stock markets slipped on Wednesday after a strong advocate of free trade resigned from the White House, fanning fears that U.S. President Donald Trump will proceed with protectionist tariffs and risk a global trade war.
But the U.S. dollar recovered most of its overnight losses as some investors wagered that even with the departure of Trump's chief economic adviser Gary Cohn, the president's hard talk could be a tactic amid ongoing trade negotiations with Canada and Mexico.
Oil prices fell more than 2 percent after U.S. government data showed an increase in crude inventories and output, though stockpiles rose less than expected.
MSCI's gauge of stocks across the globe shed 0.20 percent, while the pan-European FTSEurofirst 300 index rose 0.35 percent.
Cohn's resignation became public on Tuesday, but he and Trump had been discussing his possible departure for weeks, a White House official said.
"In the eyes of the market, (Cohn) was viewed as the adult in the room on many items," said Gene Tannuzzo, senior portfolio manager at Columbia Threadneedle Investments in Minneapolis.
"This should create a greater risk premium in the currency markets for countries that depend heavily on the U.S. for trade," he said, noting the morning declines in the Mexican and Canadian currencies.
Those two recovered early losses, with the Mexican peso turning higher against the dollar after the White House said the steel and aluminum tariffs could exclude both U.S. neighbors.
Against the greenback, the Mexican peso gained 0.05 percent to 18.73 and the Canadian dollar fell 0.33 percent to 1.29 per U.S. dollar.
However, the overall outlook for the U.S. currency was not upbeat. Goldman Sachs analysts said in a Wednesday note that tariffs similar to those proposed by Trump have usually been associated with subsequent currency weakness.
"We therefore see the latest news as an additional reason to remain cautious on the outlook for the broad dollar," according to Goldman's note.
The dollar index, which tracks the greenback against a basket of other major currencies, fell 0.02 percent, with the euro up 0.06 percent to $1.241.
The Japanese yen strengthened 0.03 percent versus the greenback at 106.11 per dollar, while sterling was last trading at $1.3902, up 0.12 percent on the day.
Steel sector stocks rose sharply on Wall Street, but not enough to keep the major U.S. indexes afloat on lingering concern that a protracted trade war would weaken the U.S. and global economies.
Losses on the S&P 500 were as deep as 1 percent at one point, but have ebbed and flowed as traders look for clues on the future of trade policy in the day's headlines.
Equities got a bid after White House trade adviser Peter Navarro, who favors strong tariffs, said in a Bloomberg interview he was not a candidate to replace Cohn.
"The market sees him (Navarro) as a very protectionist type. If he's not in the running, the market seems to like that," said Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey.
Jason Ware, chief investment officer at Albion Financial in Utah, said that with Trump keeping a close eye on stock indexes, selling sparked by tariff and trade war talks could change the president's mind.
"Indeed, here is a president who judges his success by using the stock market as an important barometer for that. So if the market votes an overwhelming vote of no confidence on these tariffs, is there a chance that things change next week?"
“I suspect that it’s still a fluid situation," Ware said.
The Dow Jones Industrial Average fell 106.72 points, or 0.43 percent, to 24,777.4, the S&P 500 lost 5.46 points, or 0.20 percent, to 2,722.66 and the Nasdaq Composite added 14.36 points, or 0.19 percent, to 7,386.37.
European car makers ended up 0.6 percent after dropping more than 1 percent on the risk of a hike in tariffs on exports to the United States.
Emerging market stocks lost 0.45 percent. MSCI's broadest index of Asia-Pacific shares outside Japan closed 0.56 percent lower, while Japan's Nikkei lost 0.77 percent.
Oil prices fell after U.S. government data showed an increase in inventories, with Washington's plans for import tariffs weighing further on investor sentiment.
U.S. crude fell 2.19 percent to $61.23 per barrel and Brent was last at $64.45, down 2.04 percent.
Benchmark 10-year U.S. Treasury notes last fell 2/32 in price to yield 2.8827 percent, from 2.877 percent late on Tuesday.
The 30-year bond last fell 10/32 in price to yield 3.1514 percent, from 3.136 percent late on Tuesday.
Spot gold dropped 0.7 percent to $1,324.41 an ounce. U.S. gold futures fell 0.75 percent to $1,325.20.
Copper lost 0.90 percent to $6,941.00 a tonne.
Additional reporting by Stephanie Kelly, Sinead Carew, Megan Davies and Kate Duguid; Editing by Bernadette Baum and James Dalgleish