(Updates prices)

* Oil jumps up to 4% as Gulf tensions disrupt Strait of

Hormuz traffic

* Fed rate hike expectations rise as U.S. inflation data

seen above target

* Dollar strengthens, euro slips as ECB signals vigilance

on energy-driven inflation

By Amanda Cooper

LONDON, May 28 (Reuters) - Stocks slipped from record

highs on Thursday after a fresh U.S. military strike on Iran and

Kuwaiti reports of missile attacks dented investor confidence in

a peace deal that many see as key to easing global inflation

risks.

Oil rose as much as 4% and bond prices tumbled as the escalation

muddied signals on peace talks, after U.S. President Donald

Trump dismissed an Iranian report of a deal to resume traffic

through the Strait of Hormuz.

"Over the next two weeks, we expect either a deal for a new

ceasefire, or the current ceasefire will have collapsed with

active hostilities resuming," said Madison Cartwright, a senior

geo-economics analyst at CBA.

He put a 70% probability on a deal, but said the fate of the

strait remained uncertain.

"Insurance through the strait has become prohibitively

expensive and it's unclear how and at what price insurance will

be made available," he added. "It is also not clear if Iran will

charge a toll, or a toll by another name."

The U.S. military said it had carried out new strikes

targeting an Iranian drone operation, while Tehran said it had

attacked a U.S. airbase in Kuwait.

With transits through the strait still at a trickle, Brent crude

was up 2.7% at $96.8 a barrel. The price has fallen back from

four-year highs above $126 in late April, but remains 33% above

pre-war levels and 50% higher than a year ago.

Yields on 10-year Treasury notes were up 2 bps at

4.5%, as sustained high oil prices kept upward pressure on

inflation expectations. Euro zone yields also rose,

with Germany's 10-year Bund up 1 bp at 3%.

The developments also cooled this week's tech-led rally in

stock markets that had pushed global indexes to new record

highs.

Europe's STOXX 600 was down 0.8% by midday, but

was still just below February's all-time peak, while U.S. stock

futures were down 0.3% to 0.5%.

INFLATION DATA TO TEST FED

Attention now turns to U.S. personal consumption

expenditures (PCE) data, which includes the Federal Reserve's

preferred inflation measure.

Higher fuel costs are expected to lift the headline PCE to a

three-year high of 3.8%, while core inflation is seen rising

0.3% to an annual 3.3%, well above the Fed's 2% target.

The pick-up has prompted more Fed policymakers to call for

dropping its easing bias, or even preparing for a rate hike.

The shift in Fed expectations has supported the dollar,

which held at 99.506 against a basket of currencies,

steady on the week.

"I know there's an awful lot of dollar bears out there, and

they have been for a while. But there's always a contrarian

story here. And it could just be that the dollar has a bit of a

resurgence now," Trade Nation market strategist David Morrison

said.

The dollar hovered near a four-week high against the yen at

159.4, just below the 160 level that has previously

triggered Japanese intervention.

The euro eased 0.2% to $1.1607 and is on track for a

1.1% monthly fall, though expectations of a June European

Central Bank rate hike offer some support.

ECB Chief Economist Philip Lane said on Thursday policymakers

must prevent the jump in energy costs feeding into broader

inflation expectations.

In commodities, gold slid 1.5% to $4,390 an ounce,

pressured by a stronger dollar and higher bond yields, which

reduce its appeal as a safe haven.

(Additional reporting by Wayne Cole in Sydney; Editing by Thomas

Derpinghaus, Mark Potter and Sharon Singleton)