* US-Iran talks in Islamabad may resume, calming oil

markets

* US PPI up less than expected; little impact on bond

market

* Fed rate cut expectations fade, yield curve flattens

By Gertrude Chavez-Dreyfuss

NEW YORK, April 14 (Reuters) - U.S. Treasuries were

steady to modestly firmer on Tuesday, lifted by optimism that

the Iran war could wind down soon, though trading remained

subdued as investors consolidated holdings and awaited clearer

developments on the conflict.

The United States and Iran could resume talks in Islamabad this

week to end the war, sources told Reuters on Tuesday, after the

collapse of weekend negotiations prompted U.S. President Donald

Trump to order a blockade on Iranian ports.

While the U.S. blockade drew angry rhetoric from Iran, signs

that diplomatic engagement might continue helped calm oil

markets, pushing benchmark prices below $100 on Tuesday.

Brent crude futures were last down 3.6% at $95.75

per barrel. U.S. West Texas Intermediate crude last

changed hands at $93.16 a barrel, down 6% on the day.

"Everything is still in wait-and-see mode, but we do have a

little bit of optimism in the market right now. It's obvious

that both the U.S. and Iran want to have some conclusion to

this, and they're working towards that," said Jim Barnes,

director of fixed income at Bryn Mawr Trust in Berwyn,

Pennsylvania.

"Before, it seemed as if they were both trying to get the

upper hand to some extent, and that's where the uncertainty kept

increasing. Now, that uncertainty has somewhat dissipated and

the market is finding comfort that a deal is going to be reached

at some point," Barnes said.

In late morning trading, the benchmark 10-year yield was

down 1.6 basis points at 4.281%. U.S. 30-year yields

slipped 1.4 bps to 4.886% .

On the shorter end of the curve, the two-year yield, which

reflects interest-rate expectations, also dipped, down about a

basis point at 3.772%.

Data showing a lower-than-expected increase in U.S. producer

prices for March had little impact on Treasuries, with the

market more focused on developments and when hostilities there

would end.

The Producer Price Index (PPI) for final demand rose 0.5%

last month after a downwardly revised 0.5% gain in February,

data showed. Economists polled by Reuters had forecast the PPI

accelerating 1.1% after a previously reported 0.7% gain in

February.

In the 12 months through March, the PPI advanced 4.0% after

increasing 3.4% in February. A Reuters poll forecast showed a

year-on-year increase of 4.7%.

Following the PPI data, U.S. rate futures have priced out

expectations of an interest rate cut by the Federal Reserve this

year, factoring in just seven bps of easing, compared with about

55 bps before the Iran war, according to LSEG estimates.

Another 13 bps of rate declines are implied next year, LSEG

data showed.

In other pockets of the bond market, the U.S. yield curve

flattened on Tuesday, with the gap between two-year and 10-year

yields at 50.1 bps, compared with 51.7 bps late

on Monday.

The curve exhibited a bull-flattening move as a result of

long-term yields falling faster than those on the short end. It

is consistent with expectations that the Fed will likely remain

on hold for the rest of the year. The curve also reflects

worries about holding longer-dated debt exposed to persistent

inflation and huge fiscal deficits.