SHANGHAI, March 23 (Reuters) - China's yuan softened to the weakest level in two weeks on Monday, as the escalating Middle East war boosted the dollar's appeal and brought uncertainty to the Chinese economy.

But some analysts believe the yuan remains in an upward trend underpinned by improving economic health, with the global oil shock potentially benefiting China's green energy exports.

The onshore yuan CNY=CFXS changed hands at 6.9098 per dollar around midday, 0.1% weaker than Friday's close.

The United States and Iran traded escalating threats and Israel planned for "weeks" more fighting, rattling global markets.

The dollar index =USD edged up 0.14% in Asia trading, having jumped over 2% this month as the broadening conflict triggered a rush for haven assets.

"Broadly speaking, the dollar index is trending high, but its headroom is limited by fundamentals," Nanhua Futures said in a note.

The brokerage expected the yuan to be volatile in the near term, thanks to the dollar strength and fading seasonal dollar selling.

Goldman Sachs said that the Iran war's impact on China "hinges on both the demand and supply situation outside of China."

If global demand weakens sharply due to the war and the soaring oil prices, "Chinese exports and growth would come under considerable pressure."

To attract investment, Chinese Premier Li Qiang pledged on Sunday to further open the country's economy to foreign firms and pursue more balanced trade with its global partners.

China's central bank governor Pan Gongsheng said at the same event that China has no need and no intention to gain a trade competitive advantage through currency depreciation.

Latest data shows forex inflows continued in February, as "more market participants view RMB appreciation as a structural trend," Goldman said.

China has a thick buffer in place to absorb oil shocks, while "over the medium term, there is a strong argument that Chinese exports could benefit from the ongoing Middle East conflict," which may boost demand for Chinese new energy products.

LEVELS AT 0403 GMT

(Reporting by Shanghai newsroom; Editing by Saad Sayeed)

((samuel.shen@thomsonreuters.com; +86 21 20830018; Reuters Messaging: samuel.shen.thomsonreuters.com@reuters.net))