UPDATE 1-Banks, luxury stocks hammered as Chinese trade fears hit Europe

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* Trump warns of "strong reaction" on Beijing's HK move

* Asia-focussed Prudential top decliner on the STOXX 600

* Burberry edges up despite sales drop, dividend pull
(Adds comment, updates prices)

By Sruthi Shankar

May 22 (Reuters) - European shares fell on Friday as a
deterioration in U.S.-China ties compounded fears of a slower
recovery from the economic damage wreaked by the COVID-19
pandemic.

Beijing on Thursday planned to impose a new security law in
Hong Kong, raising prospects of fresh protests in the global
financial hub and drawing a warning from U.S. President Donald
Trump that Washington would react "very strongly".

Rising tensions between the world's two largest economies
have stalled a recovery in equity markets in recent weeks after
Trump accused China of mishandling the coronavirus outbreak.

The pan-European STOXX 600 fell 1.4%, with
Asia-exposed stocks such as HSBC Holdings Plc tumbling
5% and Prudential Plc sliding 8.3%.

UK's FTSE 100 lagged its European peers with a 1.8%
drop.

"The China-Hong Kong dispute has deepened losses, but it is
a relatively slow moving issue," said Chris Bailey, European
strategist at Raymond James.

"With the long weekend coming, people's propensity to close
positions have been increased, resulting in some profit taking."

Most markets in UK and the U.S. are closed on Monday for
public holidays.

Oil stocks and miners were among the top
decliners as commodity prices took a hit after China dropped its
annual growth target for the first time, stoking concerns that
the pandemic will overshadow demand in the world's
second-largest oil user.

Luxury goods makers including LVMH and Kering SA
, which draw a major part of their revenue from China,
fell about 2%.

Shares in France's Renault SA slid 4.1% after
Finance Minister Bruno Le Maire said he had not signed off on a
5 billion euros ($5.47 billion) state-guaranteed loan to help
the company cope with the pandemic fallout.

Shares in Britain's Burberry rose 2.7% after its
chief executive officer said the company was encouraged by a
"strong rebound in some parts of Asia" and is well-prepared to
navigate through the COVID-19 situation despite reporting a fall
in first-quarter sales.

Despite Friday's weakness, the STOXX 600 is on course to end
the week with a modest 2% gain amid hopes that a COVID-19
treatment and easing of coronavirus-driven lockdowns will spur a
swifter economic recovery.
(Reporting by Sruthi Shankar in Bengaluru; Editing by Shounak
Dasgupta, Bernard Orr)