* Equities move lower in U.S., Europe
* Dollar drops to 6-1/2 month low versus currency basket
* Continued tension between Russia, Ukraine weighs on markets (Updates prices to U.S. mid-afternoon trading)
NEW YORK, May 6 (Reuters) - Stock markets around the world fell on Tuesday, with U.S. shares extending their decline in afternoon trading on persisting geopolitical uncertainty, which pushed investors to take profits with major indexes near record levels.
The U.S. dollar fell 0.48 percent to a 6-1/2-month low against a basket of currencies, while U.S. bond yields struggled to pull out of recent troughs and the yen and euro both gained.
U.S. stocks dropped, pressured by financial shares following disappointing results from American International Group. However, the Dow and S&P 500 remained within striking distance of record levels.
Investors were watching the ongoing unrest in Ukraine, where more than 30 pro-Russian separatists were killed in fighting near the east Ukraine rebel stronghold of Slaviansk, according to the interior minister. Russia announced plans to beef up its Black Sea warship fleet.
"Valuations are close to the ceiling and some people may be uncomfortable because of that, especially given growing nervousness over the geopolitical tensions," said Bernard Baumohl, managing director and chief global economist at the Economic Outlook Group in Princeton, New Jersey. "However, we still have room to grow before alarm bells start going off."
The Dow Jones industrial average was down 113.25 points, or 0.69 percent, at 16,417.30. The Standard & Poor's 500 Index was down 14.54 points, or 0.77 percent, at 1,870.12. The Nasdaq Composite Index was down 47.20 points, or 1.14 percent, at 4,090.85.
The benchmark 10-year U.S. Treasury note was up 6/32, the yield at 2.5878 percent.
The euro rose 0.4 percent to $1.3930 against the dollar while the yen rose 0.5 percent to 101.59. European shares fell 0.3 percent, while the MSCI International ACWI Price Index slipped 0.2 percent.
Gold dipped 0.1 percent following a sharp rally over the previous two sessions. Wheat prices - which have been tied to the situation between Russia and Ukraine, both of which are big grain producers- rose for a third straight session, up 1.4 percent.
In Europe, the European Central Bank is expected to repeat its concern about the strong euro's impact on already-low inflation when it meets on Thursday. But economists doubt the ECB will cut record-low interest rates again.
Yields on peripheral countries' lower-rated bonds also remained at multi-year, and in some cases, all-time, lows. Investors welcomed Portugal's plan to exit its bailout and continued to bet on some future easing of ECB monetary policy. (Reporting by Ryan Vlastelica; Editing by Dan Grebler)