(Updates through close of U.S. trading)
By David Randall
NEW YORK, May 31 (Reuters) - Global equities tumbled and safe-haven sovereign bonds surged Friday after U.S. President Donald Trump's unexpected threat of tariffs on Mexican goods added to fears that escalating trade wars will push the U.S. and other major economies into recession.
The yield on Germany's 10-year government bond - regarded as one of the safest assets in the world - fell to a record low while U.S. Treasury yields slipped to 20-month lows.
Washington says it will impose a 5% tariff beginning June 10, which would then rise steadily to 25% until illegal immigration across the southern border is stopped. Trump tweeted the decision late Thursday, catching markets by surprise.
"Very clearly when we all thought that the main trade tensions in the world were between the U.S. and China or perhaps between the U.S. and Europe, we hadn't realized there will be another trade tension with Mexico ... and it raises concerns about who the next country may be," said Andrew Milligan, head of global strategy at Aberdeen Standard Investments.
A key measure of Chinese manufacturing activity for May also came in below expectations, raising questions about the effectiveness of Beijing's stimulus steps and the health of the global economy.
"It is a nasty slowdown, it looks likely to be taking longer than we thought. Many thought that the slow down would be in Q1 and the recovery in Q2, but clearly everything that we see in May is telling us this will be pushed back into Q3 or Q4," Milligan added.
MSCI's gauge of stocks across the globe shed 0.76%.
On Wall Street, the Dow Jones Industrial Average fell 354.84 points, or 1.41%, to 24,815.04, the S&P 500 lost 36.8 points, or 1.32%, to 2,752.06 and the Nasdaq Composite dropped 114.57 points, or 1.51%, to 7,453.15.
The benchmark S&P 500 dropped nearly 6.6% for the month, its first monthly decline for the year to date, after hitting a record high in late April.
The pan-European STOXX 600 index lost 0.81%. Carmakers led the retreat by dropping nearly 3%, while Volkswagen and Fiat Chrysler - both significantly exposed to Mexico - tumbled 3.6% and 5%.
Spanish banks with exposure to Mexico - Santander, Sabadell and Bilbao - also suffered.
Bonds extended their bull run with 10-year Treasury yields now down around a steep 35 basis points for the month and decisively below the overnight funds rate. U.S. 3-month yields were some 20 basis points above those on 10-year Treasury bonds, the biggest inversion since 2007.
In currency markets, the dollar suffered the biggest one day fall against the safe haven Japanese yen since March at 0.8%. Against a basket of currencies, the dollar pulled 0.1% lower to trade at 98.013.
The euro also fell sharply against the Japanese yen and was down nearly 0.6% at 121.23 after touching the lowest since a Jan. 3 flash crash.
China's yuan is set for its worst month since July last year and was heading towards the crucial 7 per dollar figure. Sterling was plumbing its lowest level in nearly five months and poised for the biggest monthly drop in a year as the imminent departure of Theresa May as prime minister deepened fears about a chaotic divorce from the European Union.
In commodity markets, spot gold firmed 0.7% to $1,297.30 per ounce. Oil prices fell to a near three-month low on fears a global economic slowdown would crimp demand. U.S. crude fell nearly 6% to $53.26 barrel, while Brent crude lost 3.6% to $64.47.
Reporting by David Randall Editing by Alistair Bell and Susan Thomas