* U.S. benchmark stock indices see biggest one day fall since early February
* Russia holds war games near Ukraine; Germany's Merkel warns of catastrophe
* China growth in retail sales, factory output, investment all fall
By Caroline Valetkevitch
NEW YORK, March 13 (Reuters) - Stocks on major world markets slumped while bonds rallied on Thursday as tensions between Russia and the West increased over Ukraine and concerns about a Chinese economic slowdown rose.
Russia launched new military exercises near its border with Ukraine on Thursday and showed no sign of backing down in its plans to annex Crimea, despite a stronger than expected drive for sanctions from the EU and United States.
German Chancellor Angela Merkel warned of "catastrophe" unless Russia changed course. U.S. Secretary of State, John Kerry, said the U.S. and the E.U. would take serious steps against Russia if a referendum on Ukraine's Crimea region goes ahead as planned on Sunday.
Earlier in the day Chinese Premier Li Keqiang warned that the economy faces "severe challenges" in 2014, after weak data fanned speculation the central bank would relax monetary policy to support stuttering growth.
Benchmark U.S. stock indices fell more than 1.0 percent, posting their biggest daily losses since early February, while longer dated U.S. Treasuries prices rallied to their highest levels in over a week.
"People are increasing the probability that there may be more of a conflict (in Ukraine) than was thought before," said Priya Misra, head of U.S. rates strategy at Bank of America Merrill Lynch in New York.
While investors nervously monitored the crisis in Ukraine, their appetite for riskier assets was also diminished by fears of slowing economic growth in China.
Growth in China's industrial output came in below forecasts for the combined January/February period, with retail sales also weaker than expected, stoking worries growth there could slow as Beijing pushes for economic reforms.
On Wall Street, the Dow Jones Industrial Average fell 231.19 points or 1.41 percent, to 16,108.89. The S&P500 stock index lost 21.86 points or 1.17 percent, to 1,846.34, and the Nasdaq Composite dropped 62.912 points or 1.46 percent, to 4,260.42.
The MSCI global stock market index was down 0.8 percent, while the pan-European FTSEurofirst 300 ended down 1.1 percent. Russia's RTS stock index, ended down 2.0 percent, falling to its lowest since September 2009.
The benchmark 10-year U.S. Treasury note last traded up 19/32 in price to yield 2.658 percent.
At the same time, the Japanese yen climbed 1.1 percent against the U.S. dollar at 101.66 yen after hitting a one-week high at 101.56 in late U.S. trading. It gained 1.4 percent versus the euro to one-week peaks, last at 140.90 yen. .
The euro weakened against the dollar, ending 0.3 percent lower at $1.3858. Earlier, gains propelled the common currency to a 2-1/2-year high against the greenback at $1.3967.
Comments from the European Central Bank chief, Mario Draghi, signalling he remained open to more action to avert deflation, pressured the euro.
Gold rose to a six-month high on worries over Chinese economic growth and recent corporate bond defaults, as well as Russia's standoff with Ukraine over Crimea. Spot gold was up 0.4 percent at $1,371.74 an ounce
"Amid concerns about the Chinese economy and the geopolitical tensions between Russia and Ukraine, gold is clearly still in demand as a safe haven," said Eugen Weinberg, head of commodity research at Commerzbank.
Copper prices resumed their decline on Thursday as concerns about the economy of top consumer China intensified following data showing weak industrial output and retail sales.
With demand for the metal seen falling as Chinese economic growth slows, copper prices have fallen more than 8.0 percent since Friday and are down 12 percent for the year.
Three-month copper on the London Metal Exchange (LME) closed at $6,415 from $6,505 on Wednesday.
"The (Chinese) industrial production data has further reinforced the concerns that the threat is becoming more real and the recent policies by the PBOC are failing to rebalance their economy," said Naeem Aslam, chief market analyst at Ava Trade, referring to the Chinese central bank.
In the energy market, Brent crude oil prices fell as the weak data from China overshadowed worries about the stand-off between Russia and Western powers over Ukraine.
The conflict has provided global oil markets support in recent weeks because traders worry it could lead to a disruption of oil supplies from Russia, one of the world's largest oil producers.
Brent crude fell 63 cents to settle at $107.39 a barrel, while U.S. crude futures rose 21 cents to settle at $98.20.