By Kate Duguid

NEW YORK (Reuters) - U.S. markets received a clear warning of coming recession on Friday when the spread between yields on three-month Treasury bills and 10-year notes fell below zero for the first time since 2007 after U.S. manufacturing data missed estimates.

An inverted yield curve is widely understood to be a leading indicator of recession, and that spread is the Federal Reserve's preferred measure of the yield curve.

Preliminary measures of U.S. manufacturing and services activity for March showed both sectors grew at a slower pace than in February, according to data from IHS Markit. Manufacturing grew at the slowest pace since June 2017, and both the manufacturing and services purchasing manager index readings were weaker than analysts had forecast.

The publication of the report sent the 10-year yield, which is a proxy for investor sentiment about the health of the economy, to its lowest since January 2018 at 2.418 percent. The fall in the 10-year also weighed on the spread between two- and 10-year yields, another significant measure of the yield curve, which fell to a three-month low of 9.5 basis points.

Earlier, Germany reported that domestic manufacturing contracted further in March, driving the benchmark 10-year German government bond yield below zero and adding to fears of a global slowdown in growth.

The soft data exacerbated a trend that began on Wednesday after the Fed issued a statement showing policymakers at the U.S. central bank foresaw no further interest rate hikes for 2019 given the slowdown in the American economy.

"The reality is the market is now expecting lower rates on average over the next 10 years than we have currently. And it's a combination both of a dovish Fed and also ongoing global growth concerns," said Jon Hill, U.S. rates strategist at BMO Capital Markets.

"We're clearly beginning to see green shoots of the end of this cycle. It's now a question of timing and if the Fed's dovish pivot will be sufficient to either delay or moderate the recession."

Policymakers, in the Fed's statement, also forecast just one rate hike through 2021. In a major shift, the Fed no longer anticipates the need to guard against inflation with restrictive monetary policy. It also said it would halt the steady decline of its balance sheet in September.

(Reporting by Kate Duguid; Editing by David Gregorio and James Dalgleish)