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* European shares down 2.3 percent after Chinese stocks sink
* Oil up on Saudi/Iran tensions
* Chinese factory activity shrinks for 10th month
* Safety plays boost bond prices
By Marius Zaharia
LONDON, Jan 4 (Reuters) - European shares fell on Monday on the first trading day of 2016 after weak Chinese data rekindled global growth worries, while oil prices jumped and bond yields dropped on rising tensions in the Middle East.
Chinese manufacturing surveys showed that any hopes for a recovery in the sector were premature, with factory activity contracting for a 10th straight month in December and at a faster pace than in the previous month.
Adding to the worries, China's central bank fixed the yuan at a 4-1/2 year low. Mainland Chinese shares .CSI300 fell 7 percent, prompting the stock exchange to halt trading.
European stocks followed Asia's lead. The pan-European FTSEurofirst 300 index .FTEU3 fell 2.3 percent, while the euro zone's blue-chip Euro STOXX 50 index .STOXX50E declined by 2.6 percent. Germany's DAX .GDAXI dropped 3.4 percent.
"(Equity) investors are not going to like the start of this year, particularly when you have news that trading was halted in China due to a market sell-off," said Naeem Aslam, chief market analyst at AvaTrade.
Global oil benchmark Brent LCOc1 , which fell 35 percent last year due to fears of over-supply in a global slowdown, climbed more than a dollar to a high of $38.50 per barrel before easing back to $37.47.
The rise came as relations between leading crude producers Saudi Arabia and Iran deteriorated, raising concerns about potential supply disruptions.
Saudi Arabia, the world's biggest oil exporter, cut diplomatic ties with Iran on Sunday in response to the storming of its embassy in Tehran. Bilateral tensions escalated following Riyadh's execution of a prominent Shi'ite cleric on Saturday.
The Saudi riyal fell sharply against the dollar in the forward foreign exchange market. One-year dollar/Saudi riyal forwards SAR1Y= jumped to 680 points, near a 16-year high.
SAFE HAVENS
Those tensions prompted investors to seek the safety of bonds, with yields on triple-A rated German 10-year Bunds DE10YT=TWEB falling 6 basis points to 0.575 percent.
The cautious mood towards riskier assets helped the Japanese yen, with the dollar falling below 119 yen for the first time since mid-October JPY= .
Gold XAU= jumped nearly 1 percent to $1,069.20 per ounce.
"Concern over the health of the Chinese economy accompanied by spiking tensions in the Middle East have combined to ensure ... firm demand for safe-haven assets," Rabobank strategists said in a note.
The offshore yuan fell as low as 6.6185 to the dollar, its weakest since early 2011. Onshore, the yuan CNY= hit its lowest since April 2011, at 6.5166.
The euro firmed 0.5 percent to $1.0915 EUR= .
Investors are wondering how much further the U.S. Federal Reserve will raise rates this year after its first rate hike in almost a decade last month.
An immediate focus will be on Monday's ISM survey on U.S. manufacturing, which is expected to show the sector is still in contraction after hitting a 6-1/2-year low in November.
"It was quite unusual for the Fed to raise rates when the ISM is below 50, (which indicates contraction). And we are likely to see another month of contraction. We have to see how long this will continue," said Masahiro Ichikawa, senior strategist at Sumitomo Mitsui Asset Management.