* Dollar broadly strengthens against peers

* Traders cautious amid uncertain US-Iran diplomacy

* U.S. import prices post biggest rise in nearly four

years

(Updates to US afternoon trading)

By Laura Matthews

NEW YORK, March 25 (Reuters) - The dollar advanced

against major currencies on Wednesday, as traders weighed global

inflation trends and remained skeptical of de-escalation in the

Iran war.

Iran is still reviewing a U.S. proposal to end the conflict,

despite an initially negative response, stopping short of

rejecting it outright.

Tehran has said the Pakistan-delivered proposal was

excessive and demanded sovereignty over the Strait of Hormuz. A

senior Iranian official said talks could be held in Pakistan or

Turkey if they proceed.

President Donald Trumpsaid the U.S. was making progress in

talks with Iran, but Tehran denied direct negotiations have

taken place, keeping investors on edge.

Meanwhile, U.S. import prices posted their biggest rise in

nearly four years in February, reinforcing signs that inflation

pressures are building.

"Markets are perhaps having trouble interpreting the mixed

signals" on peace talks, said Shaun Osborne, chief FX strategist

at Scotiabank. He expects a fork in the road where either stock

volatility falls meaningfully along with the dollar, or

volatility remains elevated and stock and bond prices decline.

The U.S. dollar index, measuring the greenback's

strength against a basket of six currencies, rose 0.44% to

99.62. The euro slipped 0.39% against the dollar to

$1.1562, while the British pound fell 0.37% to $1.3362.

Sterling found little support earlier from data showing

British consumer price inflation held at an annual rate of 3% in

February, unchanged from January's rate, with inflation broadly

expected to rise as the war in the Middle East pushes up prices.

Risk assessment remains split, with stocks and bonds trading

firmer, and global crude oil prices dropping 1.37% at

$103.06 per barrel.

Against the yen, the U.S. dollar rose 0.49% to 159.46

yen. Minutes from the Bank of Japan's January policy meeting

showed many board members saw the need to keep raising interest

rates, without specifying the pace.

The Australian dollar was last down 0.63% at $0.6949.

Inflation data for February showed a 3.7% rise prior to the

start of the Iran war, slightly lower than expected by analysts.

Market expectations of U.S. policy tightening are rising.

Fed funds futures now imply a small chance of a

25-basis-point hike at the Federal Reserve's December meeting,

compared to a cut expected a week ago, CME Group's FedWatch tool

shows.

"We are seeing early signs of a more hawkish tilt from

central banks outside the Fed, particularly the ECB and BOJ,

which should begin to narrow yield differentials at the margin,"

said Joel Kruger, market strategist at LMAX Group in London.

In cryptocurrencies, bitcoin rose 1.20% to

$70,900.42, while ether was up 0.8% at $2,165.12.