(Adds U.S. market open, byline; previous LONDON)
* U.S. 2-year and 10-year Treasury yield gap inverts
* German GDP data, Chinese industrial output add to gloom
* Crude oil prices slip after previous day's big surge
* Graphic: World FX rates in 2019 tmsnrt.rs/2egbfVh
By Herbert Lash
NEW YORK, Aug 14 (Reuters) - Equity markets tanked and oil prices fell sharply on Wednesday after a closely watched bond indicator pointed to the growing risk of a U.S. recession that was heightened by data showing Germany's economy in contraction and China's worsening.
Yields on two-year U.S. Treasury notes rose above the 10-year yield for the first time since 2007, a metric known as an inversion that is widely seen as a classic recession signal.
A GDP report showing German output fell 0.1% in the second quarter from the previous three months coupled with Chinese industrial production rising at its weakest pace since 2002 added to investor fears of a global slowdown in growth.
Stocks on Wall Street fell more than 2%, as did Germany's DAX index, while the price of West Texas Intermediate, the U.S. crude benchmark, slumped almost 5%.
The yield on the benchmark 10-year U.S. Treasury note fell below 1.6% to its lowest since September 2016.
"The combination of those three things (yield inversion, Germany's GDP and Chinese industrial production) has refreshed fears of a global slowdown," said Michael Arone, chief investment strategist at State Street Global Advisors in Boston.
"We're seeing that flow through to stock prices falling and yields across the globe plummeting as well," he said.
The slide in equity and oil markets erased the previous session's sharp gains after the United States moved to delay tariffs on some Chinese products.
MSCI's gauge of global equity performance fell 1.74% and its emerging market index fell 0.52%. The FTSEurofirst 300 index of leading European shares slid 1.92%.
Negative interest rates from the European Central Bank and Bank of Japan are having an adverse effect on yields everywhere, including the United States, Arone said.
"How much more can U.S. interest rates rise in the face of all those low interest rates? In a lot of ways it's almost like the medicine continues to make the patient more sick," he said.
On Wall Street, the interest-rate sensitive bank index slipped 3.7% and the broader financial sector fell 3.0%.
Gold rose 1% while the dollar index added 0.1% and the euro fell 0.24% to $1.1144. The Japanese yen strengthened 0.93% versus the greenback at 105.77 per dollar.
U.S. West Texas Intermediate (WTI) crude futures dropped $2.68 to $54.42 a barrel, having gained 4% in the previous session, the most in just over a month.
"There is plenty of doom and gloom to spread across the globe," said John Doyle, vice president for dealing and trading at Tempus Inc in Washington. The U.S. yield curve "is a major recession indicator. Germany, Italy and the UK are likely headed for a recession. Today's Chinese data was shockingly bad."
Reporting by Herbert Lash Additional reporting by Kate Duguid in New York Editing by Paul Simao