Wall Street shares fell sharply Thursday as a rally faded over persistent concerns about the economic fallout from President Donald Trump's trade war despite his U-turn on steep new tariffs.

A larger-than-expected drop in US consumer inflation in March added to the pessimistic outlook, as it suggested that uncertainty over Trump's tariff plans has already taken a toll on the world's largest economy.

Investors in response sold off the dollar, which had already taken a hit from the trade war worries, on expectations inflation would resume pushing higher once tariffs bite.

That could force the Federal Reserve to again raise interest rates -- even at the cost of hitting growth.

"Is inflation moving sustainably lower or did businesses and consumers pull in the reins as they brace for an economic slowdown?" said Bret Kenwell, US investment analyst at the eToro trading platform.

For Daniel Murray, an analyst at Swiss bank EFG, "The fear for the Fed -- and likely also other central banks -- is that tariffs both raise inflation and lower growth at the same time."

Oil prices also tumbled on fears slowing growth would hit demand, while haven assets like gold -- which soared 3.4 percent to a new record of $3,184 an ounce -- and the Swiss franc benefitted from the search for safety.

Wall Street indices on Wednesday had posted their biggest one-day gains since 2008 when Trump announced the tariff pause late in the trading day, after his threats to impose import levies had sent stocks plummeting in recent sessions.

Asian and European markets in turn staged their own rallies at the opening Thursday, though the retreat on Wall Street took off some of the shine in the afternoon.

Trump's shock decision to delay bigger levies on goods from scores of countries by 90 days drove the European Union to put its counter-tariffs on hold.

The trade war fears had also pummelled US Treasuries -- normally considered the safest option in times of crisis -- a sign of how nervous investors had become.

"The bottom line is that the tariff narrative still remains too volatile for comfort, and markets are searching for equilibrium in a sea of uncertainty," said Fawad Razaqzada, a market analyst at StoneX.

Trump nonetheless kept a baseline 10 percent tariff intact and ramped up his trade war with Beijing by hiking duties on Chinese goods to 125 percent after facing strong retaliation.

But Chinese markets still benefitted from the relief rally on Thursday, also gaining support from optimism that Beijing would unveil fresh stimulus measures to support its economy.

Hong Kong rose more than two percent, a third day of gains after collapsing more than 13 percent on Monday, its worst trading day since the Asian financial crisis in 1997. 

"Crucially, we are currently still on course for a disorderly economic decoupling between the world's two largest economies, with no immediate signs of either US or China backing down," said Jim Reid, an analyst at Deutsche Bank. 

US Treasury yields have edged down after a successful auction of $38 billion in notes.

That eased pressure on the bond market, which had fanned worries that investors were losing confidence in the United States.