UPDATE 2-European stocks drop on trade, Brexit anxiety; Qiagen tumbles 21%

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* U.S. includes some Chinese AI firms in blacklist

* Pound gets hammered on signals of hard Brexit

* German industrial production rises unexpectedly in Aug

* LSE tumbles as Hong Kong bourse drops bid

* Airbus rises after Q4 deliveries target (Adds fresh comment, updates prices)

By Susan Mathew

Oct 8 (Reuters) - European shares fell on Tuesday as an escalation in U.S.-China trade tensions and Brexit worries along with disappointing corporate news dented sentiment.

The U.S. government widened its trade blacklist to include some of China's top artificial intelligence (AI) startups on Tuesday, and a South China Morning Post report said China had toned down its expectations ahead of high-level talks between Washington and Beijing this week.

"Coming just two days ahead of those trade talks it essentially makes one think we're going to be back in situation where we see trade talks breakdown," said Joshua Mahony, a senior market analyst at IG Group.

"(The AI blacklist) is a strategic move from the U.S. and its likely to get some sort of retaliation from China."

The pan-European STOXX 600 index ended down 1.1%. Qiagen's 21% tumble led losses after the biotech company said its chief executive would step down and warned on third-quarter preliminary sales.

All major sectors in Europe were in the red, and while most of the big markets in the region slid more than 1%, losses in London's FTSE 100 were limited to 0.8% as its exporters benefited from a battered pound.

The currency lost 0.7% after a Downing Street source said German Chancellor Angela Merkel and British Prime Minister Boris Johnson had spoken and that she had made clear a deal was "overwhelmingly unlikely".

Investors are waiting to know if this is the official response from the European Union to prepare for a hard Brexit, said IG's Mahony.

"Auto sales have been hit particularly hard by a lack of demand from the UK, so certainly the German economy has felt the uncertainty around Brexit."

Germany's export-reliant DAX fell 1.1%, with an unexpected rise in August industrial output providing little relief from fears of the economy slipping into recession.

Among stocks, some weak forecast and takeover concerns weighed on the biggest decliners. Shares of London Stock Exchange Group dropped 5.8% after Hong Kong's bourse withdrew its $39 billion bid.

Energy firm Uniper slumped 8.5% as Finnish utility Fortum got closer to full ownership of the German firm, a move Uniper's top management had warned could threaten the firm's credit rating.

Profit-taking got the best of British airline easyJet with some brokers also disappointed by a lack of positivity in the company's outlook. The carrier's 7.5% slide dragged Europe's travel and leisure sector down 1.8%, the biggest decline among major sectors.

At the other end, shares of Airbus rose 0.4% after the planemaker reported higher orders for the first nine months of the year, putting it well ahead of U.S. rival Boeing. Boeing's sales have been hampered by the grounding of its fast-selling jet, the 737 MAX, in the wake of two accidents in Indonesia and Ethiopia.

Nordic telecom companies Nokia Oyj and Ericsson rose after a report said the U.S. government had suggested issuing credit to help compete with China's Huawei.

(Reporting by Medha Singh and Susan Mathew in Bengaluru; Editing by Bernard Orr and Pravin Char)