* Dollar steady, markets concerned about Middle East

conflict dragging on

* Oil prices jump, brent crude up 3.6%

* Pound sterling pulls back, investors weigh local

election fallout

(Updates throughout)

By Sophie Kiderlin and Gregor Stuart Hunter

LONDON, May 11 (Reuters) - The dollar was steady on

Monday after U.S. President Donald Trump rejected Iran's

response to a U.S. peace proposal, sending oil prices higher and

prompting renewed concerns that the conflict in the Middle East

will drag on.

The U.S. dollar index, which measures the greenback's

strength against a basket of six currencies, was little changed

at 97.995.

Oil prices,meanwhile, jumped, with Brent crude up

3.6% at $104.94 a barrel, after President Donald Trump on Sunday

rejected Iran's response to a U.S. proposal for peace talks,

raising worries that the 10-week-old conflict may drag on.

Yet, markets still seem to believe that the conflict will be

resolved, said Kenneth Broux, head of corporate research for FX

and rates at Societe Generale.

"I think the reason for that may be the involvement of

China," he said. "The summit with China and the U.S. later this

week is, for me, the main event really," Broux said, pointing to

the influence the two countries have in the Middle East.

TRUMP IN CHINA CLOSELY WATCHED

Trump and Chinese President Xi Jinping are set to discuss

Iran, Taiwan, artificial intelligence, nuclear weapons and

critical minerals when they meet, according to U.S. officials.

Inflation and growth worries linked to higher oil prices, as

well as any potential reaction from central banks, also continue

to play on the market's mind, Broux said.

U.S. inflation data for April is due this week after the

U.S. jobs report released Friday showed that non-farm payrolls

increased 115,000 in April, almost twice as fast as expected.

Those figures reinforced expectations the Federal Reserve would

keep interest rates unchanged for some time.

The Fed held rates steady last month as expected, but the

decision exposed its deepest split in decades, with three

officials dissenting against signalling future rate cuts.

Factors that could weigh on the dollar "have become more

elusive after hawkish Fed dissents, resilient U.S. data and

continued stalemate in the Middle East," said Alex Loo, senior

macro strategist at TD Securities in Singapore.

Elsewhere, China's yuan reached its strongest level against

the U.S. dollar in more than three years at one point on

Monday.The offshore yuan was last steady, trading at 6.7928 yuan

per dollar.

Data earlier in the day showed China's producer prices

smashed expectations to hit a 45-month high in April on rising

global energy costs. That followed figures released over the

weekend showing China's export growth accelerated last month as

factories raced to meet AI-related demand.

The euro was down 0.1% at $1.1774, the yen

slipped 0.3% to 157.11 yen per dollar and the British pound

was 0.23% lower at $1.36.

In the UK, markets are closely watching any potential

fallout from last week's local elections, which saw heavy losses

for British Prime Minister Keir Starmer's Labour Party.

"While Labour losses were not quite as bad as feared, they

have failed to quell speculation over a Labour leadership

contest and a clear leftward drift in government policy," Chris

Turner, ING's global head of markets, said in a note.