(Adds close of U.S. markets)
* Wall Street rallies after steep losses on Chinaretaliation
* Dollar weakens on fears dispute could crimp global growth
* Oil skids on trade war fear, rebounds on U.S. inventory
By Herbert Lash
NEW YORK, April 4 (Reuters) - Oil edged higher and stocks onWall Street recouped steep initial losses on Wednesday afterChina retaliated in a trade spat with the United States, butinvestors set aside concerns as any impact from a budding tariffwar is still unknown.
The benchmark S&P 500 and Nasdaq composite closed more than1 percent higher, with the Dow industrials just below that markas the initial scare of an escalating dispute dissipated.
"There's a growing belief this is brinksmanship andposturing and the likelihood of us seeing a trade war is prettysmall," Robert Phipps, a director at Per Stirling CapitalManagement in Austin, Texas.
Oil prices had slipped to a two-week low as the speed withwhich Beijing responded to U.S. measures, within 11 hours,raised the prospect of a quickly spiraling dispute that couldcrimp the global economy, including the demand for crude.
Gold hit a one-week high, while prices of U.S. Treasurysecurities and German bunds gained on safe-haven buying.
Boeing and Caterpillar led a slide in big U.S. manufacturersand technology companies that likely would bear the brunt of theU.S.-Chinese dispute, while Germany's exporter-heavy DAX indexfell more than its large European market counterparts.
But stocks on Wall Street and in Europe pulled back frommore than 1 percent declines, with the FTSE in London closinghigher as the three major U.S. indexes later turned positive.
Michael Arone, chief investment strategist at State StreetGlobal Advisors in Boston, said the market overreacted.
"These tariffs won't be implemented for a little while. Itgives both sides time to negotiate, which I think is thestrategy for both the U.S. and China," Arone said.
Omar Aguilar, chief investment officer at Charles SchwabInvestment Management, said the fact fixed income and currencymarkets did not sell off suggested equity investors overreacted.
"If they're not concerned that tells you a lot about whatthe implications might be," he said.
Publication of Washington's list of tariffs starts a periodof public comment and consultation expected to last around twomonths, while the effective date of China's moves depends onwhen the U.S. action takes effect.
China's retaliation came after trading hours for Japan'sNikkei, which added 0.2 percent in thin volume, whileChinese blue chips ended down 0.2 percent.
MSCI's all-country world index of stockperformance in 47 countries rose 0.38 percent after tumblingabout 1 percent. The pan-European FTSEurofirst 300 indexof leading regional shares fell 0.43 percent.
The FTSE index in London closed up 0.05 percent,while the DAX closed down 0.37 percent and France's CAC40 index fell 0.2 percent.
The Dow Jones Industrial Average rose 230.94 points,or 0.96 percent, to 24,264.3. The S&P 500 gained 30.24points, or 1.16 percent, to 2,644.69 and the Nasdaq Compositeadded 100.83 points, or 1.45 percent, to 7,042.11.
Shares of Boeing, the single largest U.S. exporter toChina, closed down 1.02 percent, paring losses of 5.69 percentat the open. Caterpillar closed down 0.8 percent afterfalling as much as 4.8 percent.
The likelihood that China and the United States will holdprolonged talks on trade led investors to recognize equityfundamentals remain strong, as the results of first-quartercorporate earnings will show in coming weeks, Arone said.
"This is more trade poker than it is trade policy," he said.
Marc Chandler, chief global currency strategist at BrownBrothers Harriman & Co in New York, said he did not believe atrade war had started yet.
"I think of a trade war as an escalation ladder, and thesemoves are still low rungs on the ladder," he said.
There could be further ramifications, said AnindyaChatterjee, lead portfolio manager of emerging markets at FieraCapital, but "we maintain that an escalation of a tariff war isunlikely."
The dollar index fell 0.06 percent, with the euroup 0.07 percent to $1.2277. The Japanese yenweakened 0.21 percent versus the greenback at 106.84 per dollar.
Oil bounced off session lows after U.S. data showed a weeklydecline in crude stocks, instead of the increase analysts hadexpected. U.S. crude settled down 14 cents at $63.37 perbarrel and Brent slid 10 cents to settle at $68.02.
In after hours trading, both Brent and U.S. crude rose as asurprise draw in U.S. crude stockpiles triggered a rebound.
Borrowing costs nudged lower in Europe even as the firstMarch reading on euro zone inflation, important data for marketsas the European Central Bank looks to wind down its massivemonetary stimulus, came in firm at 1.4 percent.
U.S. benchmark 10-year notes fell 5/32 in priceto yield 2.8027 percent. Germany's benchmark 10-year bond yielddipped back below 0.50 percent and toward 2-1/2month lows hit last week.
U.S. gold futures for June delivery settled up $2.90at $1,340.20 an ounce.
(Reporting by Herbert LashEditing by Chizu Nomiyama, Steve Orlofsky and Susan Thomas)
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