(Updates through midday U.S. trading)
By David Randall
NEW YORK, Oct 3 (Reuters) - Weaker-than-expected U.S. economic data weighed on global financial markets on Thursday, leaving world equity benchmarks bouncing in choppy trading and sending investors into safe-haven assets on expectations of further Federal Reserve interest rate cuts.
The drop in the closely watched Institute for Supply Management's non-manufacturing activity index boosted fears that the trade war between the United States and China could push the global economy into a recession.
"The degradation of the data, especially the non-manufacturing data, kind of pushes that to the Fed doing another cut," said Kim Forrest, chief investment officer at Bokeh Capital Partners in Pittsburgh. "This is very familiar to the post-2008 world where we get bad news and the market rallies because we are anticipating a rate cut."
MSCI's gauge of stocks across the globe gained 0.03edged up 0.1%, following broad declines in Europe as investors priced in new U.S. tariffs that are set to be imposed on $7.5 billion of European goods.
Washington will enact 10% tariffs on Airbus planes and 25% duties on French wine, Scotch and Irish whiskies and cheese from across the continent as punishment for EU subsidies to Airbus.
On Wall Street, the Dow Jones Industrial Average fell 24.58 points, or 0.09%, to 26,054.04, the S&P 500 gained 2.47 points, or 0.09%, to 2,890.08 and the Nasdaq Composite added 26.28 points, or 0.34%, to 7,811.53.
Each index had been slightly positive before the ISM data was released shortly after the market opened and fell more than 1% before recovering some of their losses.
Fears of an economic slowdown helped push investors into the perceived safety of bonds. Benchmark 10-year U.S. Treasury notes last rose 17/32 in price to yield 1.5393%, from 1.597% late on Wednesday.
"The big question for a lot of folks is whether this is the third slowdown since the financial crisis or are we now heading for a global recession?" said Anujeet Sareen, a fixed income portfolio manager and global macro strategist for Brandywine Global. He added that his base case scenario was for a slowdown.
"The wild card in the pack is always Donald Trump and whatever he tweets next."
Asian shares racked up losses earlier in the day. Japan's Nikkei stock index closed down 2%, its biggest one-day decline since Aug. 26.
"Risk aversion is broadly on the rise and that has been triggered by the weakness in U.S. manufacturing ISM data earlier this week," said Manuel Oliveri, an FX strategist at Credit Agricole in London.
"The outperformance of the U.S. economy compared to other major economies has held the dollar and other risky assets up but that has changed this week."
The string of weak economic data has increased market expectations that the Federal Reserve will continue cutting interest rates at its next policy meeting. Traders see a 98% chance the Fed will cut rates by 25 basis points to 1.75%-2.00% in October, up from 39.6% on Monday, according to CME Group's FedWatch tool.
Bets on a rate cut could rise further if a U.S. non-farm payrolls report on Friday show weakness in the labor market.
Brent crude futures were last down 1.1% to $57.06 a barrel, while U.S. West Texas Intermediate (WTI) crude fell 1.6% to $51.81 per barrel.
Reporting by David Randall Editing by Chizu Nomiyama and Dan Grebler