* World shares up, but set for weekly drop
* Oil prices rally more than 3%
* German Q1 GDP falls 2.2% Q/Q
* Graphic: World FX rates in 2020 tmsnrt.rs/2egbfVh (Updates price action, adds data)
By Dhara Ranasinghe
LONDON, May 15 (Reuters) - World stocks edged higher on Friday and oil prices rallied more than 2%, as sentiment revived after a week pressured by deteriorating U.S.-China relations.
Oil prices rose to their highest levels in more than a month on signs that demand from China is picking up and data showed China's industrial output in April expanded for the first time this year.
European shares were broadly higher, with stock markets in London, Paris and Frankfurt tracking overnight gains in U.S. and Asian markets .
U.S. stock market futures however were mixed, highlighting a degree of caution among investors.
After a bruising week, a broad measure of European stocks was set to end the week 3% lower - the biggest weekly fall since the mid-March rout in global stocks.
MSCI's world stock index, a touch firmer on Friday, is down around 2.5% this week.
Analysts said this week's drop, while a natural correction after a rally since mid-March, also reflected growing concerns about rising U.S.-China tensions.
The Trump administration on Friday moved to block shipments of semiconductors to Huawei Technologies from global chipmakers, an action that could ramp up tensions with China.
U.S. President Donald Trump on Thursday signalled a further deterioration in his relationship with China over the novel coronavirus, saying he has no interest in speaking to President Xi Jinping and suggesting he could even cut ties with Beijing.
"There is no doubt that the optics around the trade/diplomacy backdrop have worsened in the last week and this has had a negative influence," Chris Bailey, European strategist at Raymond James in London, said.
"There has also been a subtle change in the perceptions of market participants, for example the negative interest rate debate getting a very good airing in the United States."
U.S. Federal Reserve Chair Jerome Powell has brushed off the notion that the Fed could push rates below 0% after futures tied to Fed interest rate policy expectations began pricing a small chance of sub-zero U.S. rates within the next year.
Two-year U.S. Treasury yields are trading at just 0.15% , while short-dated bond yields in Britain have dipped back below 0% this week.
Faced with an exceptional hit from the coronavirus crisis, central bankers are under intense pressure to do more to shore up battered economies.
The German economy contracted by 2.2% in the first quarter, its steepest three-month slump since the 2009 financial crisis as shops and factories were shut in March to contain the spread of the coronavirus, preliminary data showed on Friday.
"While the drop is smaller than during the worst quarter of the financial crisis (Q1 2009), the most serious damage of COVID-19 is yet to come," Florian Hense, an economist at Berenberg, said.
On the currency markets, the euro was little changed at around $1.0812, while the dollar dipped 0.15% to 107.05 yen.
Britain's pound was about a third of a percent weaker against the euro and the dollar, as the focus turned to talks between Britain and European Union leaders on their future relationship.
The Turkish lira was back below 7 per dollar and on course for its best week since February as it recovers from all-time lows.
Reuters reported that Turkey has reached out to various countries for swap lines as it scrambles to try to shore up financing.
Reporting by Dhara Ranasinghe; Editing by Angus MacSwan and Barbara Lewis