* Iran halts US talks, oil prices surge, market reacts to

geopolitical tensions

* US Treasury yields jump, 10-year note posts biggest

rise in two weeks

* Fed rate hike expectations increase as high oil prices

persist, Strait of Hormuz remains closed

By Chuck Mikolajczak

NEW YORK, June 1 (Reuters) - U.S. Treasury yields

climbed on Monday, with the benchmark 10-year Treasury note on

track for its biggest daily jump in two weeks, after a report

that Iran was halting talks with the United States sent oil

prices sharply higher.

Iran's Tasnim news agency said Tehran's negotiating team is

stopping exchanges of messages with the United States through

mediators due to attacks on Lebanon, as diplomatic efforts to

end the three-month-old Iran war continue.

U.S. crude surged 7.82% to $94.19 a barrel and Brent

shot up to $97.30 per barrel, up 6.78% on the day

following the report.

"It's somewhat of a sharp reaction, but at the same time, I

kind of feel as if there is a somewhat of a longer barrier than

usual where the market kept thinking that this could get

resolved, this could get resolved, this could get resolved, and

then today's announcement is in a category of a commentary that

contradicted that," said Jim Barnes, director of fixed income at

Bryn Mawr Trust in Berwyn, Pennsylvania.

The yield on the benchmark U.S. 10-year Treasury note

rose 5.5 basis points to 4.508% and was on pace

for its biggest daily jump since a 13.6 basis point climb on May

15.

Yields fell last week on cautious optimism progress was

being made towards a peace agreement between the U.S. and Iran,

which pushed oil prices down to their lowest level since

mid-April.

The yield on the 30-year bond added 2.8 basis

points to 5.021%.

MANUFACTURING DATA BEATS FORECASTS

Yields briefly extended gains after the Institute for Supply

Management said its manufacturing PMI advanced to 54.0 last

month, the highest reading since May 2022 and above the 53.0

estimate of economists polled by Reuters, from 52.7 in April.

A closely watched part of the U.S. Treasury yield curve

measuring the gap between yields on two- and 10-year Treasury

notes, seen as an indicator of economic

expectations, was at a positive 42.4 basis points.

Separately, the Commerce Department said construction

spending rose 0.4% after a downwardly revised 0.2% increase in

March and compared with forecasts for a 0.2% gain.

"Today's economic data is going to be overshadowed by the

increased tension between Iran and the U.S.," said Barnes.

The two-year U.S. Treasury yield, which

typically moves in step with interest rate expectations for the

Federal Reserve, climbed 6.8 basis points to 4.082%.

The persistently high crude prices as the Strait of Hormuz

has remained closed has altered market expectations for the Fed

this year. Markets are now pricing in about a 60% chance for a

hike of at least 25 basis points at the central bank's December

meeting, up from about 45% on in the prior session, after

pricing in roughly two cuts at the start of the year.

The breakeven rate on five-year U.S. Treasury

Inflation-Protected Securities (TIPS) was last at

2.579% after closing at 2.53% on May 29.

The 10-year TIPS breakeven rate was last at

2.43%, indicating the market sees inflation averaging about 2.4%

a year for the next decade.