(Reuters) - European stocks fell on Wednesday while nervous investors took refuge in high-rated bonds as Russia amassed troops on its border with Ukraine, raising concerns among western powers that it could invade.

The euro came under pressure, trading at nine-month low against the dollar amid threats of retaliatory Russian sanctions against the European Union, and signs the crisis in Ukrainewas hitting Europe's biggest economy Germany. [FRX/]

German industrial orders slid in June at their steepest rate since September 2011, and theeconomy ministry said political tensions had probably led to more caution from customers.

"We are getting closer to a situation where we really have an escalation of the conflict... sanctions being stepped up, and things moving out of control," said Elwin de Groot, senior market economist at Rabobank.

European stocks fell 1.3 percent - the biggest one-day fall in nearly a month - while MSCI's world equity index was down 0.5 percent. Dollar-traded Russian stocks hit a three-month low.

U.S. futures indicated that Wall Street would open down roughly 0.3 percent.

German 10-year bond yields fell 7 basis points to a record low of 1.10 percent, on track for their biggest daily drop in nearly a year.

Yields on lower-rated peripheral bonds rose, extending losses after data showed the bloc's third largest economy Italy had unexpectedly slipped back into recession.

"From a medium-term perspective, the data we got from Italy this morning is much more worrying than Russia... It could be a big problem for the European Central Bank if we don't get a sharp rebound any time soon," said Frederik Ducrozet, senior economist at Credit Agricole, said.

The ECB, which is due to meet on Thursday, has made unprecedented policy moves in recent months to try to keep the bloc's fragile recovery on track.

Portuguese bonds were the worst hit on Wednesday, rising 7 bps to 3.79 percent. The country's main bourse shed 3.8 percent to hit its lowest level in over a year, with financial stocks suffering over concerns about fallout from a rescue plan for ailing Banco Espirito Santo. [.EU]

'SABRE-RATTLING'

Russia has built up around 20,000 combat-ready troops on Ukraine's eastern border and could use the pretext of a humanitarian or peacekeeping mission to invade, NATO said on Wednesday.

The European Union and the United States last week agreed tough new sanctions against Russia over its actions in Ukraine, marking a new phase in the biggest confrontation between Moscow and the West since the Cold War.

Russian Prime Minister Dmitry Medvedev threatened on Tuesday to retaliate for the grounding of a subsidiary of national airline Aeroflot because of EU sanctions, with a newspaper reporting that European flights to Asia over Siberia could be banned.

"The latest catalyst seems to be this saber-rattling at the border, and the market just has no upward momentum. This talk of tit-for-tat sanctions is also adding to the risk-off tone," Jeremy Batstone-Carr, analyst at Charles Stanley, said.

DOLLAR STRENGTH

Risk aversion and upbeat U.S. economic data, which included a rise in service-sector activity to a nine-year peak and a uptick in factory orders, helped lift the dollar to an 11-month high against a basket of major currencies.

The dollar index rose as high as 81.681, its highest level since last September.

China's yuan hit a 4-1/2-month high on Wednesday, as other emerging Asian currenciesslid, indicating that traders may be preparing the ground for robust second half gains.

The New Zealand dollar skidded to two-month lows after milk prices fell again at an auction held by Fonterra Co-operative Group, the world's biggest dairy exporter.

Oil prices remained under pressure as plentiful supplies in Europe and North America outweighed fears that violence in the Middle East and North Africa could disrupt production.

Brent crude edged up 43 cents on Wednesday to $105.04, but that followed its weakest close since November 2013. U.S. crude was 35 cents firmer at $97.73, following its lowest settlement since early February.

Gold failed to get much of a lift from safe-haven flows and idled at $1,289.66 an ounce.