* U.S. agrees to refrain from car tariffs on EU for now
* World stock index hits highest since mid-March
* European auto sector jumps 2 pct, European stocks up
* Chinese stocks still suffer as concerns persist
* Graphic: World FX rates in 2018 tmsnrt.rs/2egbfVh
By Abhinav Ramnarayan and Tommy Wilkes
LONDON, July 26 (Reuters) - European equities powered higher on Thursday, pushing world stocks to new four-month highs after the European Union and the United States agreed to negotiate on trade, easing fears of a transatlantic trade war.
However, concerns over the slowing pace of world economic growth, the prospect of escalation in the Sino-U.S. trade spat and some lacklustre company earnings reports prevented markets from rallying further, and Wall Street looked set for a weaker session.
In what the EU chief called a “major concession,” U.S. President Donald Trump agreed on Wednesday to refrain from imposing car tariffs while the two sides launch negotiations to cut other trade barriers.
European gains were led by the continent’s auto sector, which was up more than two percent, with Germany’s export-reliant and auto-heavy index up 1.5 percent. Auto shares, highly vulnerable to tariff wars, have performed poorly this year, with earnings forecasts downgraded in recent months.
Gains elsewhere were more subdued and a pan-European stock index rose 0.5 percent while the MSCI world equity index, which tracks shares in 47 countries, was up a quarter percent to the highest since March 16.
“The lifting of the threat of tariffs on the auto sector in particular is a major development. We’ve not seen a lot of actual measures implemented but it should lift the confidence of manufacturers,” said RBC European economist Cathal Kennedy.
“The feedthrough should come through in the manufacturing sector and confidence indicators in the coming months.”
The equity gains pushed up government bond yields in the U.S. and Europe, with Germany’s 10-year yield, the benchmark for the euro zone, coming close to a one-month high at 0.42 percent.
Foreign exchange markets were more cautious about seeing the EU-U.S. announcement as a substantial breakthrough, with the euro down against the dollar and other currencies such as the Japanese yen and the Swiss franc.
The euro, having initially strengthened on the news, fell back 0.2 percent to $1.1707 as traders turn their attention to the European Central Bank monetary policy meeting later on Thursday.
The dollar was flat against a basket of currencies.
U.S. equities were set to open weaker, with Nasdaq futures down the most by 0.8 percent. That follows a 21 percent after-hours slump in tech giant Facebook after its quarterly report. Facebook losses could weigh on the entire tech sector, where Amazon and Intel will post second-quarter results later in the day.
Asian markets were also more circumspect, on fears that U.S. trade policy would now squarely be concentrated on China.
China’s Shanghai Composite index fell 0.7 percent and blue-chip shares lost 1.1 percent. This kept MSCI’s Asian shares outside Japan flat.
While the transatlantic mood was improving, “this deal, along with the breakdown of a large M&A deal, leave investors fearing that the trade war has just turned even more so on China,” Citi analysts told clients.
They were referring to Qualcomm’s decision to drop its $44 billion bid for NXP Semiconductors after a deadline for securing Chinese regulatory approval passed.
Economic growth worries are also mounting — economists polled by Reuters said global activity had peaked, with trade protectionism seen having a significant downward impact .
Data out of South Korea on Thursday showed slowing growth and exports reinforced that picture.
Another poll indicated U.S. second quarter growth — with data due on Friday — also would mark the peak.
Trade and growth worries have already taken their toll on some companies’ bottom lines.
U.S. automakers General Motors, Ford Motor and Fiat Chrysler Automobiles have cut profit forecasts, while Germany’s Daimler blamed U.S.-China tariffs for a 30 percent drop in second-quarter profit.
With U.S.-EU trade fears pushed into the background for now, the focus will return to central bank policy - the softer U.S.-EU tone should help the ECB stick with its plan to gradually withdraw stimulus.
Brent crude touched a 10-day high of $74.68 per barrel, extending gains into a third day after Saudi Arabia suspended crude shipments through a strategic Red Sea shipping lane.
Additional reporting by Andrew Galbraith in SHANGHAI and Tommy Wilkes in London Editing by Hugh Lawson and Stephen Powell