* MSCI global stock index rebounds after hitting two-month low
* Trump calls trade war 'little squabble,' says talks ongoing
* Italian concerns weigh down euro; dollar index rises
* Oil prices rise on drone attack on Saudi Aramco facilities (Updates to close of U.S. 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 gained 0.49% on Tuesday.
Trump insisted 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%.
On Wall Street, technology stocks led the rebound but major indexes finished below their session highs. The Dow Jones Industrial Average rose 207.06 points, or 0.82%, to 25,532.05, the S&P 500 gained 22.54 points, or 0.80%, to 2,834.41 and the Nasdaq Composite added 87.47 points, or 1.14%, to 7,734.49.
“It’s a nice bounce-back certainly after yesterday for sure," said Gary Bradshaw, portfolio manager of Hodges Capital Management in Dallas. "It seems like President Trump has been more jovial and more upbeat in making comments that hopefully will get this trade situation squared away. I think that’s got investors buying the dip.”
The pan-European STOXX 600 index rose 1.01%.
The U.S. 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 0.2%, with the euro down 0.15% to $1.1206.
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 3/32 in price to yield 2.4139%, 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 settled up 1.2% at $61.78 a barrel, while Brent settled at $71.24, up 1.4%.
Additional reporting by Dhara Ranasinghe in London and Danilo Masoni in Milan; Editing by Bernadette Baum and Susan Thomas