* Germany's DAX falls 1.1 pct
* STOXX 600 dips 0.5 percent
* Euro zone bond yields edged down
* Oil prices steady
By Julien Ponthus
LONDON, Aug 2 (Reuters) - Fears of an escalating trade dispute between the United States and China spread from Asian markets to Europe on Thursday, triggering a fall in bonds yields and stocks, particularly among exporters.
Germany's blue-chip index DAX, which is seen by as trade war proxy, fell 1.1 percent about an hour after the open while the broader pan-European STOXX 600 was down about 0.5 percent.
Euro zone government bond yields edged down with borrowing costs in Germany and France pulling back from seven-week highs as demand for safe-haven debt grew after the U.S. administration increased pressure on China by proposing a higher 25 percent tariff on $200 billion worth of Chinese imports.
MSCI's broadest index of Asia-Pacific shares outside Japan closed 1.6 percent down, dragged down by a 1.8 percent fall in Chinese H-shares.
Analysts blame the current retreat in world stock markets on the uncertainty around the trade policy of the Trump administration, while recent corporate results are seen encouraging.
"One needs to have a strong gut feeling to invest in this environment and in August, I doubt many people will have one" said Herve Goulletquer, deputy head of research at France's La Banque Postale Asset Management in Paris.
He added that investors badly needed a "framework of interpretation" to read through the trade statements of the Trump administration and the poor visibility on that front was holding markets back.
The British pound was slightly down at $1.3086 ahead of an expected rate hike by the Bank of England later in the day.
While a rate hike is widely expected and mostly priced in, analysts warned clients not to be complacent as the market reaction would probably be tough to read.
"While a failure to act would in all likelihood trigger a sharp selloff in the pound, given the rate rise is already priced in," said Michael Hewson of CMC Markets, "we could well see some sterling weakness in any case if the bank is overly dovish in its guidance."
The Federal Reserve kept interest rates unchanged on Wednesday, as expected, characterizing the U.S. economy as strong and staying on track to increase borrowing costs in September and likely again in December.
Oil prices steadied after losses over the past two days from a surprise increase in U.S. crude inventories and renewed concerns over trade friction between the U.S. and China.
Brent crude futures LCOc1 were up flat at $72.39 a barrel by 0854 GMT, after dropping 2.5 percent on Wednesday.
For Reuters Live Markets blog on European and UK stock markets open a news window on Reuters Eikon by pressing F9 and type in 'Live Markets' in the search bar. (Julien Ponthus; Editing by Jon Boyle)