* U.S. 3-year/ 10-year curve inverts, German yields turn negative
* Global stocks tumble, oil falls
* U.S./ European data miss expectations
* (Recasts after U.S. open, adds commentary, changes dateline; previous London)
By Sinéad Carew
NEW YORK, March 22 (Reuters) - The spread between three-month Treasury bills and 10-year note yields inverted for the first time since 2007 on Friday and stocks around the world fell after soft U.S. and European data fueled fears of a global economic slowdown following this week's dovish turn by the U.S. Federal Reserve.
The inverted yield curve is widely understood to be a leading indicator of recession.
Earlier, the 10-year yield had broken below the psychologically significant 2.5 percent level, hitting its lowest since December 2017.
This was after German 10-year bond yields dived below zero for the first time since October 2016 after German data showed manufacturing contracted in March for a third straight month 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 a big drop in demand.
Wall Street's major indexes followed European shares lower and stocks around the world deepened their losses after the inversion occurred in the first half hour of U.S. trading.
"The data looks soft globally, particularly out of Europe. The U.S. yield curve inversion is not positive but we have to see if the U.S. economy stabilizes in the second half of the year," said Mona Mahajan, U.S. investment strategist at Allianz Global in New York.
"If we get a trade deal in the next few months that could be the beginning of a stabilization. It seems markets have not priced in a Brexit crash out scenario."
The Dow Jones Industrial Average fell 286.88 points, or 1.1 percent, to 25,675.63, the S&P 500 lost 32.03 points, or 1.12 percent, to 2,822.85 and the Nasdaq Composite dropped 111.33 points, or 1.42 percent, to 7,727.63.
The pan-European STOXX 600 index lost 1.09 percent and MSCI's gauge of stocks across the globe shed 1.06 percent.
Preliminary measures of U.S. manufacturing and services activity for March showed both sectors grew at a slower pace than in February, according to data from IHS Markit. Manufacturing activity grew at the slowest pace since June 2017, and both the manufacturing and services purchasing manager index readings were weaker than analysts had forecast.
The data compounded worries about the U.S. economic outlook after the Fed on Wednesday adopted a more dovish than expected stance, anticipating no further interest rate hikes this year and planning an end to its balance sheet roll-offs.
Benchmark 10-year notes last rose 28/32 in price to yield 2.439 percent, from 2.539 percent late on Thursday.
“You have to take it seriously that it is a signal for slowing growth or a potential recession in the next 12 to 18 months. This is what the Fed looks at closely,” said Sean Simko, head of global fixed income management at SEI Investments Co. in Oaks, Pennsylvania.
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.
U.S. President Donald Trump said trade negotiations with China were progressing and a final agreement "will probably happen," adding that his call for tariffs to remain on Chinese imported goods for some time did not mean the talks were in trouble.
The dollar index rose 0.22 percent, with the euro down 0.8 percent to $1.1282.
The Japanese yen strengthened 0.72 percent versus the greenback at 110.04 per dollar, while Sterling was last trading at $1.3191, up 0.64 percent on the day.
After plunging toward $1.30 on Thursday, Sterling recovered a little after European Union leaders gave Prime Minister Theresa May a two-week reprieve, until April 12, to decide how to leave the European Union.
Oil fell more than 2 percent, slipping further from 2019 highs as focus shifted to a lack of progress in U.S.-China trade talks and as the grim manufacturing data from Germany and the U.S. reignited fears of a slowdown in the global economy.
U.S. crude fell 2.33 percent to $58.58 per barrel.
Additional reporting by Kate Duguid, Richard Leong and Saqib Iqbal Ahmed in New York, Karin Strohecker and Marc Jones in London, Hideyuki Sano & Tomo Uetake in Tokyo; Graphic by Sujata Rao; Editing by Toby Chopra and Dan Grebler