* MSCI global stock index rebounds after hitting two-month low
* Trump: Talks didn't collapse, tariff war 'a little squabble'
* Italian concerns weigh down euro
* Oil prices jump on drone attack on Saudi Aramco facilities (Updates to afternoon trading)
By Lewis Krauskopf
NEW YORK, May 14 (Reuters) - U.S. and European stocks regained ground on Tuesday after President Donald Trump downplayed the U.S.-China trade war as "a little squabble" a day after a spike in tensions between the world's two largest economies rattled financial markets.
Fears that the United States and China were spiraling into a fiercer, more protracted trade dispute that could derail the global economy have shaken investors in the past week. On Monday, MSCI's gauge of stocks across the globe posted its biggest one-day decline in over five months and touched a two-month low. The MSCI index bounced back on Tuesday to gain 0.81%.
On Wall Street, the Dow Jones Industrial Average climbed 347.87 points, or 1.37%, to 25,672.86, the S&P 500 gained 38.53 points, or 1.37%, to 2,850.4 and the Nasdaq Composite added 122.52 points, or 1.6%, to 7,769.54.
The pan-European STOXX 600 index rose 1.01%.
Trump said trade talks with China had not collapsed, while China's Foreign Ministry spokesman said the two sides had agreed to continue pursuing relevant discussions. This followed Washington's decision last week to hike its levies on $200 billion of Chinese imports to 25% from 10%.
The benchmark S&P 500 recorded its biggest one-day loss since Jan 3 on Monday, after China struck back in the trade dispute by saying it would impose higher tariffs on a range of U.S. goods.
“It’s likely that it will take markets a day or two to adjust to this increased rhetoric around trade, because markets up until a week ago thought that trade had been put to bed,” said Carol Schleif, deputy chief investment officer with Abbot Downing in Minneapolis.
In another sign trade tensions are hurting the economic outlook, Germany's ZEW institute said investors' mood had deteriorated unexpectedly in May.
In currencies, the dollar index, which measures the greenback against a basket of currencies, rose 0.18%, with the euro down 0.12% to $1.121.
The euro slid after Italy’s deputy prime minister said the country was ready to break European Union budget rules if necessary to spur employment. Italian government bond yields rose sharply.
Benchmark U.S. 10-year Treasury notes last fell 6/32 in price to yield 2.4245%, from 2.405% late on Monday.
Oil prices climbed after top exporter Saudi Arabia said explosives-laden drones launched by a Yemeni armed movement aligned to Iran had attacked facilities belonging to state oil company Aramco.
U.S. crude rose 1.41% to $61.90 per barrel and Brent was last at $71.41, up 1.68% on the day.
Additional reporting by Dhara Ranasinghe in London and Danilo Masoni in Milan; Editing by Bernadette Baum