* Trump's tariff on steel and aluminium raises trade war fears

* U.S. debt yields fall as trade worries dwarf inflation jitters

* U.S. junk bonds post largest fall since Nov 2016

By Hideyuki Sano

TOKYO, March 2 (Reuters) - Stock markets in Asia on Friday extended a Wall Street rout as investors were rattled after President Donald Trump announced the United States would impose hefty tariffs on steel and aluminium imports, raising the spectre of a global trade war.

MSCI's broadest index of Asia-Pacific shares outside Japan dropped 0.8 percent, led by a fall in South Korean shares while Japan's Nikkei tumbled 2.4 percent.

Asian steelmaker shares dropped, with South Korea's Posco falling 3 percent and Japan's Nippon Steel 4 percent.

On Wall Street, the S&P 500 lost 36.16 points, or 1.33 percent, to 2,677.67 on Thursday, coming a day after the investors sold off heavily on worries the Federal Reserve might increase rates more than expected this year.

"The world stands on the brink of a trade war as Donald Trump announces severe tariffs on steel and aluminium - forget the yield curve - this is how recessions start," said Robert Carnell, head of research, Asia-Pacific at ING In Singapore.

"Trade is just about the only thing economists are agreed on - more is better."

Trump said the duties of 25 percent on steel and 10 percent on aluminium would be formally announced next week, although White House officials later said some details still needed to be ironed out.

Investors fear Trump's decision could spark retaliatory moves from major trade partners like China, Europe and neighbouring Canada in a blow to the global economy.

The anxiety was underscored by Canada's quick response, with officials in Ottawa saying they will retaliate against any U.S. tariffs on steel and aluminium products.

The concerns of a harmful trade war eclipsed the upbeat U.S. economic data published on Thursday, including a rise in the manufacturing index to 14-year highs and another showing the number of Americans filing for unemployment benefits hitting a 48-year low.

U.S. inflation picked up as the PCE price index, a gauge of underlying inflation, advanced 0.3 percent in January - the largest gain since January 2017. On the year, it posted an increase of 1.5 percent, in line with the previous two months.

"Even if you manufacture goods, if someone doesn't buy them, you have to scale back your production, leading to slowdown in global economic activities," said Daisuke Uno, chief strategist at Sumitomo Mitsui Bank.

"I would expect markets entered another period of correction," he added.