* U.S. gasoline up nearly 7 pct as storm closes refineries
* Dollar extends falls amid clouded economic outlook
* European stocks hurt by strong euro
* Asian markets subdued, U.S. stock futures flat
* Graphic: World FX rates in 2017 tmsnrt.rs/2egbfVh (Updates prices)
By Dhara Ranasinghe
LONDON, Aug 28 (Reuters) - U.S. gasoline futures jumped to two-year highs while an already weak dollar hit 16-month lows against a basket of currencies on Monday as Tropical Storm Harvey pummelled the heart of the U.S. energy sector and raised concerns about the economy.
The dollar index, on the defensive since U.S. Federal Reserve Chair Janet Yellen failed to mention monetary policy in a closely watched speech at Jackson Hole on Friday, extended its falls as the most powerful storm to hit Texas in more than 50 years was seen as negative for economic growth.
Weakness in the U.S. currency helped the euro to its highest in two and a half years at close to $1.20, building on gains made on Friday after European Central Bank chief Mario Draghi refrained from talking down the strong currency.
Renewed euro strength pushed European stock markets to a two-week low, with German and French stock markets down around 0.3 percent each .
Trade in general was subdued, with the London market closed for a public holiday.
"The strong euro is weighing on European stock markets," said London Capital Group analyst Ipek Ozkardeskaya.
"Tapering talks could further demoralise stock traders in the run-up to the ECB verdict (next month). IT stocks are again on the chopping block."
U.S. stock futures were largely flat.
Gasoline futures soared as much as 6.8 percent as the storm, which came ashore on Friday, continued to batter the state. They were last up 5 percent.
U.S. crude futures fell as the refinery shutdowns could reduce demand for American crude.
Brent futures also eased, but losses were capped as pipeline blockades in Libya slashed the OPEC country's production by nearly 400,000 barrels per day.
Harvey is the most powerful hurricane to hit Texas in more than 50 years, killing at least two people, causing large-scale flooding, and forcing the closure of Houston port as well as several refineries.
It has knocked out a quarter of oil production from the Gulf of Mexico, prompting fears it could overturn years of excess U.S. oil capacity and low prices.
"Although the full impact of the storm's damage is yet to be determined, the markets expect the impact will be felt globally and affect energy markets for many weeks," an analyst at FxPro said in a note.
U.S. economic growth more than halved in the quarter after Hurricane Katrina mauled Louisiana in August 2005, but bounced back by early 2006 as reconstruction began and gasoline prices moderated.
Asian stock markets including Japan's Nikkei index ended the session little changed, though shares in Japanese property and casualty insurers skidded as investors fretted about the broader impact of the U.S. storm.
In contrast, China's major stock indexes rose to 20-month highs after a series of strong earnings .
Markets mostly dismissed North Korea's firing of three short-range missiles into the sea on Saturday.
While the euro extended Friday's gains against the dollar, the U.S. currency also slipped against the yen, dipping 0.1 percent to 109.23 yen.
The dollar index – which tracks the U.S. currency against six major rivals – fell to as low as 92.372, its weakest since early May 2016, before recovering a little to trade 0.3 percent down at about 92.489.
Those declines came after Fed chief Yellen focused more on financial stability in her Jackson Hole speech.
The remarks disappointed some investors who had hoped for hints on the Fed's plans for interest rates, though most analysts had not expected Yellen or Draghi to shed new light on policies.
"Draghi does not seem to be overly concerned with the current euro levels, which is the market's justification to move the euro higher," said Commerzbank currency strategist Esther Reichelt.
Reporting by Dhara Ranasinghe; Additional reporting by Nichola Saminather in SINGAPORE, Danilo Masoni and Jemima Kelly in LONDON; Editing by David Goodman and Richard Balmforth