* Indexes down: Dow 0.38, S&P 500 0.19%, Nasdaq 0.23%

* Asset managers drop after Blue Owl caps investor

withdrawal

* Tesla deliveries mark weakest quarter in a year

* Indexes set for biggest weekly jump in four months

(Updates to afternoon trading)

By Sabrina Valle and Twesha Dikshit

April 2 (Reuters) - U.S. stocks pared early losses on

Thursday as oil prices pulled back from session highs after

diplomatic moves raised some hopes of easing tensions in the

Middle East, but inflation concerns still weighed on markets

ahead of a long holiday weekend.

Investor sentiment steadied in the afternoon after Iran's

foreign ministry said it was drafting a protocol with Oman to

manage traffic through the Strait of Hormuz and Britain said

about 40 countries discussed how to end the crisis. Stocks had

opened lower amid rising oil prices following remarks from U.S.

President Donald Trump that threatened tougher action against

Iran.

Front-month crude prices surged, with U.S. crude up nearly

11% at around $111 a barrel. The international reference Brent

was up about 6.6% near $108. But traders were pricing it at $81

per barrel in October, a signal that they expect the disruption

to be temporary.

"The market has no real conviction either way right now, but

October prices tell you the market thinks this crisis will

likely be over by the fall," said Michael Antonelli, market

strategist at Baird.

At 2:09 p.m., the Dow Jones Industrial Average fell

0.38% to 46,388.83 points, the S&P 500 lost 0.19% to

6,562.91 points and the Nasdaq Composite lost 0.23% to

21,790.98.

The rebound reflected caution, with investors favoring areas

seen as more resilient to economic stress. Utilities, which tend

to offer steady earnings and dividends, rose about 0.5%, while

consumer staples - makers of everyday necessities - gained

nearly 0.4%, as consumer discretionary stocks slid more than

1.4%, the worst-performing sector on the day.

Wall Street had opened sharply lower after Trump signaled

more aggressive attacks on Iran, in a sharp reversal from his

earlier comments that the U.S. will be "out of Iran pretty

quickly".

Michael Matousek, head trader at U.S. Global Investors, said

investors were optimistic about the global economy not being in

a recession and a gradual fall in oil prices heading into the

long weekend, prompting an improvement in risk appetite.

The three indexes are on track for their biggest weekly rise

in four months and the first week of gains in six, as signs

earlier this week that the conflict could end soon lifted

sentiment.

Wall Street's fear gauge, the CBOE VIX index rose to

25.24 points after falling to an over one-week low on Wednesday.

Separately, private credit jitters resurfaced after Blue Owl

capped the amount investors can withdraw from two of its

retail-focused funds, sending its shares down 1.7%.

On the S&P 500, consumer discretionary shares

weighed the most, led by a 5.7% drop in Tesla after its

first-quarter delivery figures.

Further developments on Elon Musk's SpaceX will be in focus

after it confidentially filed for a U.S. initial public offering

on Wednesday, and is expected to target a $1.75 trillion

valuation.

Friday's nonfarm-payroll numbers will be in the spotlight

after weekly jobless claims fell last week, but U.S. markets

will remain closed throughout the long weekend.

Money market participants are no longer pricing in any

easing from the Federal Reserve, per CME Group's FedWatch Tool.

They were anticipating two cuts before the conflict.

Globalstar's ( GSAT ) shares jumped 7.8% after a report said

Amazon is in talks to buy the low-earth-orbit communication

satellites company.

Markets will be closed on Friday for the Good Friday

holiday.