* Indonesian inflation accelerates towards top of c.bank's

target range

* South African manufacturing sentiment deteriorates in June

* Poland's manufacturing sector worsens most in almost a

year

By Utkarsh Hathi and Ragini Mathur

July 1 (Reuters) - Emerging market stocks paused on

Wednesday, starting the new quarter on a cautious note after a

strong second-quarter rally, as uncertainty over U.S.-Iran talks

weighed on sentiment and currencies slipped against a firmer

dollar.

The MSCI emerging-market equities index edged

lower, after a powerful second-quarter advance.

Asian markets were mixed, with some of the biggest recent

winners of the AI-linked rally coming under pressure.

South Korea's main index fell 2%, while Taiwan's

tech-heavy benchmark added 2%.

For emerging markets, the pause signals an early cautious

tone on whether the second-quarter rally can persist in the face

of rising geopolitical risk, renewed pressure from a stronger

dollar and signs of stubborn inflation in parts of the

developing world.

Risk sentiment was dented by mixed signals from the Middle

East. Iran said on Tuesday it would not meet top U.S. envoys who

had travelled to the region, with the two sides still far apart

on a framework to fully reopen the vital Strait of Hormuz

shipping route.

Still, indirect technical talks between the U.S. and Iran

were under way in Doha, with Qatar and Pakistan acting as

mediators, a source with direct knowledge of the discussions

told Reuters.

UAE and Saudi Arabian bonds fell nearly 1 cent on the

dollar, reflecting regional nerves.

Bahrain's five-year credit default swaps rose 5 basis points

from Tuesday's close to 246 bps, S&P Global Market Intelligence

said.

Brent crude futures edged lower, but while oil prices have

retreated to levels before the Iran war, economies are still

dealing with the aftershocks of the earlier energy spike.

Inflation in Indonesia accelerated toward the top of the

central bank's target range, while the country posted its first

trade deficit in six years. The rupiah fell 0.3% against

the dollar.

The dollar extended gains as investors increased bets on a

hawkish Federal Reserve this year, while U.S. Treasury yields

rose overnight ahead of key jobs data on Thursday.

Markets will also scrutinise remarks from Federal Reserve

Chair Kevin Warsh at a European Central Bank conference later in

the day for signals on the policy outlook.

"Both the dollar and interest rates have historically tended

to have a relatively significant impact on emerging markets as a

whole and on certain markets in particular. That's unlikely to

change in the very short term," said Maximilian Kunkel, chief

investment officer for CEEMEA at UBS.

"But the story is also increasingly becoming more about

strong earnings growth, cheap valuations, and exposure to

long-term structural themes such as AI and commodities."

The EM currency gauge edged 0.2% lower.

In emerging Europe, Poland's manufacturing sector suffered

its sharpest deterioration in almost a year in June, PMI data

showed, while Hungary's seasonally adjusted PMI rose to 51.5.

The Polish zloty was flat, while the Hungarian

forint slipped 0.6% against the euro. Hungary's

stocks rose 0.5%, while Poland's benchmark edged 0.1%

lower.

Turkey's manufacturing sector also contracted in June,

pressured in part by fallout from Middle East tension, a survey

showed. Turkish equities gained 0.5%, while the lira

was flat.

In South Africa, manufacturing sentiment deteriorated in

June on weaker demand, though lower oil prices improved

confidence about future business conditions. The rand and

local stocks fell 0.2% and 0.8%, respectively.

HIGHLIGHTS:

** Investors have regained appetite for Zambia after

default, Citi says

** Global AI wave revs up Asian factories, offsetting

war-induced pain

** U.S. seen not extending USMCA, starting decade-long

countdown to end trade pact

For TOP NEWS across emerging markets

For CENTRAL EUROPE market report, see

For TURKISH market report, see

For RUSSIAN market report, see

(Reporting by Utkarsh Hathi and Ragini Mathur in Bengaluru)