(Updates through close of U.S. trading)
By David Randall
NEW YORK, Oct 3 (Reuters) - The latest weaker-than-expected U.S. economic data on Thursday fed hopes that the Federal Reserve would cut U.S. interest rates this month, which helped lift global equities slightly after two days of declines, but investors also parked some funds in U.S. Treasuries and other safe-haven assets.
The drop in the closely watched Institute for Supply Management's non-manufacturing activity index boosted fears that the U.S.-China trade war could push the global economy into a recession.
"The degradation of the data, especially the non-manufacturing data, kind of pushes that to the Fed doing another cut," said Kim Forrest, chief investment officer at Bokeh Capital Partners in Pittsburgh. "This is very familiar to the post-2008 world where we get bad news and the market rallies because we are anticipating a rate cut."
MSCI's gauge of stocks across the globe gained 0.39%, following broad declines in Europe as investors priced in new U.S. tariffs that are set to be imposed on $7.5 billion of European goods.
Washington will enact 10% tariffs on Airbus planes and 25% duties on French wine, Scotch and Irish whiskies and cheese from across the continent as punishment for EU subsidies to Airbus.
On Wall Street, the Dow Jones Industrial Average rose 123.1 points, or 0.47%, to 26,201.72, the S&P 500 gained 23.1 points, or 0.80%, to 2,910.71 and the Nasdaq Composite added 87.02 points, or 1.12%, to 7,872.27.
Each index had been slightly positive before the ISM data was released shortly after the market opened and fell more than 1% before recovering their losses.
Fears of an economic slowdown helped push investors into the perceived safety of bonds. Benchmark 10-year U.S. Treasury notes last rose 18/32 in price to yield 1.5359%, from 1.597% late on Wednesday.
"The big question for a lot of folks is whether this is the third slowdown since the financial crisis or are we now heading for a global recession?" said Anujeet Sareen, a fixed income portfolio manager and global macro strategist for Brandywine Global. He said his base case scenario was for a slowdown, and added that the unpredictability of U.S. President Donald Trump was a complicating factor.
"The wild card in the pack is always Donald Trump and whatever he tweets next."
Asian shares racked up losses earlier in the day. Japan's Nikkei stock index closed down 2%, its biggest one-day decline since Aug. 26.
"Risk aversion is broadly on the rise and that has been triggered by the weakness in U.S. manufacturing ISM data earlier this week," said Manuel Oliveri, an FX strategist at Credit Agricole in London.
"The outperformance of the U.S. economy compared to other major economies has held the dollar and other risky assets up but that has changed this week."
The weak economic data has increased market expectations that the Fed will cut rates again. Traders see a 98% chance the Fed will cut rates by 25 basis points to 1.75%-2.00% in October, up from 39.6% on Monday, according to CME Group's FedWatch tool.
Bets on a rate cut could rise further if a U.S. non-farm payrolls report on Friday shows weakness in the labor market.
Brent crude futures were last down 0.3% to $57.51 a barrel, while U.S. West Texas Intermediate (WTI) crude fell 0.8% to $52.22 per barrel.
(Reporting by David Randall Editing by Chizu Nomiyama, Dan Grebler and David Gregorio)