* Middle East developments expected to dominate markets

* Oil surge, rising Treasury yields in focus

* Investors watch technical levels as S&P 500 drops below

key trendline

By Lewis Krauskopf

NEW YORK, March 20 (Reuters) - A Middle East crisis that

has convulsed markets should remain the focal point for Wall

Street in the near term, as investors stay glued to developments

in Iran and the fallout from surging energy prices.

As the U.S.-Israeli war on Iran stretches to three weeks, an

over 40% jump in oil prices has driven worries about higher

inflation and stagnating economic growth.

Inflationary concerns were prompting markets nearly to rule out

any equity-friendly interest rate cuts this year that investors

had previously counted on. Federal Reserve Chair Jerome Powell

expressed deep uncertainty at the U.S. central bank's meeting on

Wednesday about how the crisis would factor into the economy,

muddying its ability to forecast conditions ahead.

The benchmark S&P 500 stock index was set for its

fourth straight weekly decline. Middle East tensions escalated

this week, as Iran attacked energy facilities across the region

following Israel's strike on its gas field.

"This is a situation that's so fluid," said Chris Fasciano,

chief market strategist at Commonwealth Financial Network. "We

could have a resolution in the next week or it could go on for

some time. And the longer it goes on, you start to think about

the impacts it could have on the U.S. economy."

WATCHING OIL, STOCKS' 'ORDERLY' REACTION

Swings in crude prices have rippled through asset classes.

U.S. crude reached $100 a barrel on Thursday, while Brent

was hovering at $110. In addition to the attacks on

energy infrastructure, traffic has stalled in the Strait of

Hormuz, through which around a fifth of the world's crude oil

and liquefied natural gas normally passes.

The 20-day correlation between the S&P 500 and U.S. crude

stood at -0.926 as of Thursday morning, according to LSEG data,

a strong inverse relationship that shows they have been tending

to move in opposite directions.

"If you're a trader, you watch oil prices because I do think

that that's generally giving the leading indicator as to how the

financial markets are viewing the outlook for the conflict,"

said Eric Kuby, chief investment officer at North Star

Investment Management Corp.

The S&P 500 energy sector, which includes shares of

oil companies, has gained since crude prices began to spike in

late February, but the group accounts for less than a 4% weight

in the benchmark index.

The latest declines left the S&P 500 down just over 5% from

its record closing high set in late January. The pullback so far

mostly lacked the chaotic quality of the abrupt equity slide

last April following President Donald Trump's "Liberation Day"

tariff announcement that set off broad economic worries,

Fasciano said.

"This has been fairly orderly, which I think is an

encouraging sign," Fasciano said. "And I think it's because the

underlying fundamentals for corporate America are still fairly

robust and are offering some support."

TREASURY YIELDS, MARKET TECHNICALS ALSO IN FOCUS

Fast-climbing Treasury yields, driven higher by the energy

price spike and caution from global central banks, were looming

as a risk factor for stocks. The benchmark 10-year Treasury

yield hit 4.328% on Thursday, its highest level

since August, before paring back.

Keith Lerner, chief investment officer at Truist Advisory

Services, said he was watching whether the 10-year Treasury

yield sustainably rises above 4.3%, which could increase

pressure on stocks.

"Rates going higher means borrowing costs are somewhat

higher. And then that could actually slow the economy," Lerner

said. "At some point if they keep going higher, then the

relative attractiveness of (bond) yields becomes more attractive

relative to equities."

Stocks were also near key technical levels. The S&P 500 on

Thursday closed at 6,606.49, below its 200-day moving average --

a closely watched long-term trendline -- for the first time

since May.

A breakdown below that trendline "especially if followed by

a breach of the November lows at 6,522, would raise more serious

questions about the staying power of this bull market," Adam

Turnquist, chief technical strategist for LPL Financial, said in

a note on Thursday.

Reports on manufacturing, services activity and consumer

sentiment highlight a relatively light week ahead for U.S.

economic data. A major energy conference in Houston that will

feature top global industry executives could draw Wall Street's

attention.

Events in Iran were likely to loom largest. In a note on

Thursday morning, analysts at UBS Global Wealth Management said

the latest developments were "pushing markets to price in a

higher risk of prolonged conflict, deeper infrastructure damage

and higher-for-longer crude prices."

"While a less damaging outcome in the Strait of Hormuz

remains possible, recent events have narrowed that path and

heightened the risk of continued volatility," the UBS analysts

said.