* Trade war will only make us stronger, China's top paper says
* MSCI world index falls, S&P 500 little changed
* Sterling falls as Brexit talks collapse
* China's yuan hits weakest since November
* U.S. consumer sentiment robust before escalation of trade war (Updates with afternoon U.S. trading)
By Lewis Krauskopf
NEW YORK, May 17 (Reuters) - A major global stocks index fell modestly on Friday while the Chinese yuan weakened as persistent global trade tensions hovered over financial markets.
Geopolitical concerns also spiked on news that talks regarding Britain's split with the European Union had faltered, putting pressure on the British pound.
MSCI's gauge of stocks across the globe shed 0.25%, but pared steep early losses.
"Markets are priced so close to perfection that it really doesn’t take very much of a wobble to any of the bull narratives to catalyze moves in the market, and I think that’s what we’re seeing with the trade headlines," said Pete Cecchini, chief market strategist with Cantor Fitzgerald.
In China, the Communist Party's People's Daily wrote in a front-page commentary that the U.S. trade war will only make China stronger and will never bring the country to its knees.
It was the latest salvo in the trade conflict that has involved tit-for-tat tariffs on imports involving the world's two largest economies. Recent tensions caught some investors off guard after they had expected the two sides to come to a near-term deal to resolve the months-long trade dispute.
Meanwhile, the Washington Post and Politico reported that U.S. officials have agreed to remove tariffs on steel and aluminum imported from Canada and Mexico in 48 hours, paving the way for the three North American counties to enact a new trade pact.
"What’s driving the market on a day-to-day basis is the 24-hour news cycle of headlines primarily around U.S.-China trade relations," said Walter Todd, chief investment officer at Greenwood Capital Associates in Greenwood, South Carolina.
Wall Street's main indexes seesawed in afternoon trade.
The Dow Jones Industrial Average rose 35.07 points, or 0.14%, to 25,897.75, the S&P 500 lost 1.01 points, or 0.04%, to 2,875.31 and the Nasdaq Composite dropped 27.29 points, or 0.35%, to 7,870.76.
U.S. consumer sentiment jumped to a 15-year high in early May amid growing confidence over the economy's outlook, but much of the surge was recorded before an escalation in the U.S.-China trade war, which could hurt activity.
Shares of Deere & Co fell 6.3% after the agriculture equipment maker cut its full-year outlook, as the trade war threatens to hit farm incomes further.
The pan-European STOXX 600 index lost 0.36%.
In currencies, the Chinese yuan fell as far as 6.949 against the dollar on Friday, its weakest since Nov. 30.
The dollar index, which measures the greenback against a basket of currencies, rose 0.09%, with the euro down 0.06% to $1.1165. Concern about next week’s European parliamentary elections dented demand for the euro.
Sterling hit a four-month low after cross-party Brexit talks collapsed and concern grew about the impact Prime Minister Theresa May's likely resignation would have on Britain's exit from the European Union.
German bond yields fell back toward 2-1/2-year lows following the escalating trade tensions and collapse of Brexit talks.
U.S. Treasury yields fell as traders sought safe-haven assets.
Benchmark U.S. 10-year notes last rose 3/32 in price to yield 2.3944%, from 2.405% late on Thursday.
U.S. crude fell 0.16% to $62.77 per barrel and Brent was last at $72.15, down 0.65% on the day.
Additional reporting by Marc Jones in London; Editing by Dan Grebler and James Dalgleish