(Updates prices as of 1107 GMT)

By Tom Wilson

LONDON, April 17 (Reuters) -

World shares edged up on Wednesday, though investors stayed

cautious at the prospect of U.S. interest rates staying higher

for longer, which in turn pushed Treasury yields to five-month

highs and buoyed the dollar.

European shares gained 0.7%, supported by

personal and household goods stocks, after notching

their worst session in nine months a day earlier on geopolitical

tensions in the Middle East.

U.S. stock futures , meanwhile, turned

positive, after Wall Street had fallen on Tuesday.

U.S. Federal Reserve Chair Jerome Powell said on Tuesday

that recent inflation data, with three months of upside

surprises, had not given policymakers enough confidence to ease

policy soon. The central bank may need to keep rates higher for

longer than previously thought.

Markets have already slashed bets on the number of U.S. rate

cuts this year to fewer than two, a sea change from about six

cuts predicted at the beginning of the year. The first rate cut

is still expected in September, although the market's confidence

in that has declined.

Tensions between Iran and Israel also kept a cap on riskier

bets, said Alexandre Marquis, senior portfolio manager at asset

manager Unigestion. Markets had already priced in the prospect

of fewer rate cuts than previously hoped, he added.

"Part of the disappointment was already in the price, with

the recent correction we have seen in the last few days," said

Marquis.

The MSCI world equity index, which

tracks shares in 47 countries, was flat.

Powell's comments kept the dollar broadly steady,

which in turn rooted the Japanese yen near 34-year

lows.

Two-year Treasury yields tested 5% overnight, and

were last at 4.9642, on the diminishing expectations of Fed

easing this year, while 10-year yields held near a

five-month high. Yields move inversely to prices.

Euro zone bond yields paused for breath, trading near a

1-1/2-month high. Germany's benchmark 10-year yield

was last 0.3 basis points higher on the day at 2.48%.

Earlier, MSCI's broadest index of Asia-Pacific shares

outside Japan rose 0.3%, after plunging more

than 4% in the past three sessions. Japan's Nikkei,

however, dropped 1.3% to its lowest in two months.

Still, Taiwanese shares outperformed regional stocks

with a gain of 1.6%, as chip-making giant Taiwan Semiconductor

Manufacturing Co ( TSM ) rose 2% ahead of its earnings report.

SLOW BUT STEADY

The International Monetary Fund said on Tuesday the global

economy was set for another year of slow but steady growth, with

U.S. strength pushing world output through headwinds from

lingering high inflation, weak demand in China and Europe, and

spillovers from two regional wars.

Underscoring the threat of escalation in the Middle East,

Britain's foreign minister David Cameron said during a visit to

Israel on Wednesday that Israel had clearly decided to retaliate

against Iran for missile and drone attacks.

The dollar index, which measures the greenback

against its major peers, was last down 0.2% at 106.19. The

beleaguered yen was last steady at 154.60 per dollar as the

prospect of Japanese government intervention in currency markets

loomed, though so far there has been no action from Tokyo beyond

from verbal warnings.

"In the dollar you have a confluence of geopolitical

concerns and a changed expectation for the Fed," said Dan Kemp,

chief investment officer at Morningstar. "Energy prices may play

into that a little bit but my guess is that the impact will be

overwhelmed by what is happening with those other two factors."

In commodities, oil prices slipped as demand concerns

outweighed heightened tension in the Middle East. Brent

futures fell 0.8% to $89.27 a barrel, while U.S. crude

dropped 0.8% to $84.64 a barrel.