* Strong data lifts U.S. dollar against currency basket
* China manufacturing index dips, missing forecasts
* Gold up, 10-yr Treasury yield dips just shy of 3 pct
NEW YORK, Jan 2 (Reuters) - World equity markets kicked off 2014 with a whimper on Thursday as slightly disappointing Chinese manufacturing data triggered some profit-taking, while oil prices were sharply lower as Libya prepared to reopen a major oilfield.
U.S. stock indexes posted their largest falls in three weeks on the first trading day of 2014, after the benchmark S&P 500 finished its best year since 1997.
The dollar rallied against a basket of major currencies as U.S. jobs, housing and manufacturing data gave support to the Federal Reserve's decision to start slowing its stimulus program this month.
Global manufacturing ended 2013 on a strong note as major exporters like Japan, Germany and Italy posted their fastest growth in years, although manufacturing data from China proved disappointing.
"There's no fundamental underpinning to the decline today, just basic portfolio rebalancing on the first day of a new tax year," said Jim McDonald, chief investment strategist at Chicago-based Northern Trust Global Investments. "People are taking profits and seeking bargains."
The Dow Jones industrial average fell 135.31 points or 0.82 percent, to 16,441.35, the S&P 500 lost 16.38 points or 0.89 percent, to 1,831.98 and the Nasdaq Composite dropped 33.521 points or 0.8 percent, to 4,143.069.
The pan-European FTSEurofirst 300 ended down 0.8 percent after starting the day at a 5-1/2-year high. MSCI's 45-country share index was down 1 percent. U.S. dollar-denominated Nikkei futures fell 2.1 percent.
Crude oil prices fell after Libya prepared to restart a major oilfield and on speculation of a sharp rise in U.S. stocks.
Brent was last down 2.8 percent at $107.72 a barrel while U.S. crude was last at $95.47 per barrel, down 3 percent, the most since November 2012.
A report by industry group Genscape showed a 1 million barrel rise in stocks at Cushing, Oklahoma, the benchmark delivery point for U.S. oil futures.
Spot gold climbed 1.5 percent to $1,223.39 an ounce. The move recouped a few of the losses that made last year gold's worst in three decades.
Three-month copper rose to its highest level in seven months but failed to hold above resistance near $7,420 per ton. It was recently up 0.5 percent at $7,393.
The euro, the strongest-performing major currency in 2013 but historically a weaker performer at the start of a calendar year, dropped to a two-week low of $1.3634 and last traded 0.7 percent lower at $1.3654.
The dollar rose to its strongest level versus the yen since October 2008, hitting a high of 105.44 yen, before erasing gains to trade down 0.5 percent at 104.75 yen.
Against a basket of major currencies, the greenback rose 0.7 percent -- the most in five months.
"The U.S. dollar has started the year with strength, and a shift in market dynamics suggests the dollar may continue to gain versus the euro and other counterparts," said David Rodriguez, quantitative strategist at DailyFX in New York.
Amid a firming jobs market and brightening economic outlook, the Federal Reserve said in December it would reduce its monthly $85 billion bond buying program by $10 billion starting in January.
Yields on U.S. 10-year paper dipped below 3 percent after hitting a high of 3.04 percent. U.S. Treasuries prices were up, with investors moving out of stocks after last year's jump.