* European shares fall over Ukraine but head for weekly gain
* Dollar index slips even as yen drifts off session highs
* Bunds gain as investors head for safety
* U.S. stocks expected to open lower, earnings eyed
By Marc Jones
LONDON, April 25 (Reuters) - Heightened tension in Ukraine pushed world shares lower and lifted safe-haven European bonds as well as gold on Friday, taking the shine off what looked set to be an earnings and M&A-driven week of gains for European and U.S. stocks.
Russia warned on Friday that Kiev would face “justice” for Thursday’s killing of up to five pro-Russian separatists, while Kiev said Moscow was looking to start World War Three.
European shares tumbled 0.6 percent as concerns mounted that the United States and Europe were readying tougher sanctions on Russia that were bound to be met with retaliatory measures from Moscow.
The DAX in Germany, which has the region’s strongest trade ties with Russia, fell 1.4 percent.
But German government bonds, favoured by risk-wary investors, gained in tandem with their U.S counterparts and gold.
“The (Ukraine) prime minister has been making comments about Russia wanting to start World War Three, so I think it’s fair to say people aren’t going to be in a rush today to sell safe-havens,” said Saxo Capital Markets senior market analyst Nick Beecroft.
London’s FTSE and Paris’s CAC40 dropped 0.4 and 0.6 percent as they limped towards weekly gains of about 0.5 percent.
Russian shares were staring at a weekly loss of almost 6 percent while the rouble and Russian bonds took another beating after a ratings downgrade by Standard & Poor‘s.
Russia’s central bank unexpectedly raised interest rates on Friday as it reacted to the slump in the rouble which is driving up import prices and inflation.
“The conflict and the threat of sanctions by definition increase risks for financing. It risks turning into a negative dynamic,” said Societe Generale analyst Regis Chatellier.
Asian stocks had also stumbled earlier and markets on Wall Street were expected to open 0.2-0.4 lower when trading resumes on another busy day of company earnings headlined by car giant Ford and consumer goods firm Colgate-Palmolive.
U.S. Secretary of State John Kerry has said time is running out for Moscow to change its course in Ukraine. President Barack Obama will speak to European leaders later to push for fresh sanctions against Russia.
Germany’s Angela Merkel told Russia’s Vladimir Putin in a call on Friday she was gravely concerned about the situation in eastern Ukraine and expected Russia to honour the agreement it struck in Geneva last week to cool the situation.
The Ukraine concerns lifted gold back above $1,300 an ounce after it had touched its lowest levels since February on Thursday as Brent oil prices held close to seven-week highs at $110 a barrel.
Another gloomy day for Chinese equities had further darkened the mood in Asia as concerns about the state of China’s economy and its banking sector continued. The country’s currency the yuan also hit a fresh 16-month low.
The safe-haven yen and Swiss franc rose to near one-week highs against a struggling dollar on Friday as deepening concerns about Ukraine outweighed growing optimism about U.S. economic growth.
The dollar last stood at 102.19 yen, not far from Thursday’s one-week low of 102.085, at the end of a lacklustre week against the safe-haven yen during which it has lost about 0.1 percent.
“Geopolitical risks are not having too much of an impact on currencies with most investors still focused on growth prospects,” Credit Agricole FX strategist Manuel Oliveri said.
The euro held steady at $1.3836, having recovered from Thursday’s low of $1.3791, hit after European Central Bank President Mario Draghi reiterated the potential for asset purchases to ward off deflation risks. The pound was also little changed despite upbeat retail sales data.
Copper dipped after hitting $6,775 a tonne, its highest in over a month, while there appeared to be no stopping nickel as the impact of Indonesia’s recent trade ban lifted it to its highest in 14 months. (Additional reporting by Anirban Nag in London; Editing by Hugh Lawson)