* German bund yields turn negative for first time since Oct. 2016
* U.S. bond yields at lowest since early 2018
* Pound under pressure, EU demands UK decision by Apr 12
* U.S. stocks indicated to open lower
By Karin Strohecker
London, March 22 (Reuters) - German 10-year bond yields dived below zero while European shares and the euro fell on Friday after grim data from the continent fuelled fears of a global economic slowdown following this week's dovish turn by the U.S. Federal Reserve.
Yields on Germany's 10-year government bond turned negative for the first time since October 2016 after data showed manufacturing contracted for a third straight month in March, compounding worries that trade disputes are exacerbating a slowdown in Europe's biggest economy.
Factory activity across the euro zone as a whole looked equally dismal, contracting at the fastest pace in nearly six years on the back of a big drop in demand.
European stocks suffered with German shares falling 0.3 percent after plumbing to their lowest in two weeks earlier. Equities in Paris tumbled 0.8 percent while London's FTSE dropped 1 percent. Europe's banking as well as industrial goods & services sectors led the falls.
"Numbers like the ones we have seen this morning from the European manufacturing sector in Europe would suggest there is more weak data to come," said Tim Graf, EMEA Head of Macro Strategy at State Street Global Advisors.
"Everybody is looking for that inflection point, I guess, for when it is finally going to get better - and it's not quite arrived yet."
MSCI's gauge of stocks across the globe slipped 0.2 percent, pulling away from the 5-1/2 months high hit earlier in the week. U.S. stock futures indicated the souring mood would spill over to Wall Street, with e-mini futures for the Down Jones, S&P and Nasdaq all down 0.4 percent.
The German data compounded worries about the U.S. economic outlook after the Fed on Wednesday surprised investors by adopting a sharply dovish stance, anticipating no further interest rate hikes this year and ending its balance sheet rolloffs.
The decline in German bund yields comes after the U.S. yield curve flattened further overnight, indicating increased market expectations of a recession.
The spread between the three-month Treasury bill yield and the 10-year note yield shrank to its narrowest level since August 2007 in the wake of the U.S. Federal Reserve's decision to cease tightening monetary policy as the American economy shows signs of contraction.
"The main market reaction to the Fed's announcement was that it has become a consensus that the Fed's next move is a rate cut," said Naoya Oshikubo, senior manager at Sumitomo Mitsui Trust Asset.
"As economic data from China and elsewhere has not bottomed out yet, investors will be looking at economic fundamentals for now. If there are improvements, then markets could roll back expectations of a Fed rate cut," he said.
Adding to the uncertainty are worries over how much progress the world's two largest economies will be able to make when they meet for another round of trade talks next week.
Bloomberg reported on Friday that U.S. officials downplayed the prospect of an imminent trade deal with Beijing, just as a U.S. trade delegation headed by Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin is set to visit China on March 28-29.
In currency markets, the dollar gained 0.3 percent against a basket of six rival currencies in a second straight day of gains.
The euro tumbled 0.6 percent to $1.1301, pulling further away from Wednesday's 1-1/2-month high of $1.14485.
Britain's pound stood at $1.3147 after recovering overnight when European Union leaders gave Prime Minister Theresa May a two-week reprieve, until April 12, to decide how to leave the European Union.
Sterling had plunged towards $1.30 on Thursday in its biggest one-day fall this year as fears mounted that Britain would crash out of the bloc on March 29.
The EU has said Britain can have a short delay to Brexit, as requested by May, but she must first win parliamentary approval for her withdrawal deal that sets out the future relationship between London and its biggest trading partner.
In commodity markets, oil prices pulled away from 2019 peaks as economic growth concerns hurt sentiment, pausing a three-month rally that was driven by OPEC-led supply cuts and U.S. sanctions against Iran and Venezuela.
Brent crude oil futures and U.S. crude futures slipped both around 1 percent to $67.06 and $59.43 per barrel respectively.
Reporting by Karin Strohecker in London, additional reporting by Marc Jones in London, Hideyuki Sano & Tomo Uetake in Tokyo; Graphic by Sujata Rao; Editing by Toby Chopra