*

US attacks on Iran raise concerns over oil, retaliation

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S&P 500 near February highs but showing signs of

stagnation

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Rising oil prices spark worries about inflation and Fed

policy

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Investors look to upcoming U.S. economic data for market

direction

(Updates June 20 week-ahead preview with latest in Iran-Israel

conflict, fresh comments)

By Saqib Iqbal Ahmed

NEW YORK, June 22 (Reuters) - Investors are bracing for

a knee-jerk selloff in stock markets on Monday after the

weekend's U.S. attack on Iran raised the specter of retaliation

and higher oil prices.

The Middle East situation takes center-stage for markets,

overshadowing U.S. economic data releases this week, as

investors assess the impact of President Donald Trump's sudden

decision to join Israel's military campaign against Iran on

sentiment, inflation and interest rates.

Trump called the attack "a spectacular military success" in

a televised address to the nation and said Iran's nuclear

enrichment facilities had been "obliterated". He said the U.S.

military could go after other targets in Iran if the country did

not agree to peace.

Iran said it reserved all options to defend itself, warned

of "everlasting consequences", and stepped up its strikes on

Israel.

"It's hard to imagine stocks not reacting negatively and the

question is how much. It will depend on Iranian reaction and

whether oil prices spike," said Steve Sosnick, chief market

strategist at Interactive Brokers in Connecticut.

"Really what we're looking at is secondary order effects -

the price of oil, market stability, price hikes through the

economy. No globally important stock is directly affected by

what happened tonight."

The S&P 500 is hovering just below its February highs

but has rebounded sharply from its early-April selloff, as

tariff-related tensions have eased. However, the U.S. benchmark

index appears to be taking a breather at some 2.7% below its

February closing high. The index has gone 27 trading sessions

since coming within 5% of its February high but has not yet set

a new record.

The Israel-Iran conflict has already sent oil prices sharply

higher and led to caution in markets.

So far, the oil market has absorbed most of the impact from

geopolitical turmoil, with equities relatively stable. Yet stock

investors remain concerned that higher oil prices could stoke

inflation and upset plans for interest rate cuts from the

Federal Reserve.

On Wednesday, the Fed held rates steady and policymakers

signaled borrowing costs are still likely to fall this year. But

they estimated the overall pace of expected future rate cuts

would be slower than they saw at their March meeting. They cited

expectations that higher inflation would flow from President

Donald Trump's tariff plans.

"The question is oil prices and what that does to inflation

- which has implications for monetary policy and how long the

Fed keeps rates "meaningfully restrictive"," said Sonu Varghese,

global macro strategist at Carson Group.

While investors expect the Middle East tensions to spur a

near-term bout of nervousness in stock markets and a rush to

safer assets such as the dollar and Treasuries, some also

envisage a de-escalation in the situation.

"I think it's going to be very positive for the stock

market," said Mark Malek, chief investment officer of Siebert

Financial, referring to how investors had been primed for two

weeks of uncertainty based on White House statements that Trump

would take that long to decide on his next move.

"So this will be reassuring, especially since it seems like

a one and done situation and not as if (the U.S.) is seeking a

long-drawn out conflict."

Investors will also parse a slew of incoming data releases,

including U.S. business activity and housing sales on Monday,

consumer confidence numbers on Tuesday and the PCE Price Index

on Friday.

U.S. consumer confidence plunged in the past few months,

with households fearing tariffs could prompt a recession and

higher inflation. However, with inflation in check and the U.S.

reaching a truce in its trade fight with China, investors were

expecting to see a pickup in sentiment.

"Remember, the survey-based data all got crushed in the

March, April, May time frame ... my expectation is we're still

going to see an improvement," Mark Hackett, chief market

strategist at Nationwide said before the U.S. struck Iran.