* US consumer sentiment slumps in early August, survey shows

* Retail sales data show surprise drop

* Brent crude heading for 6% weekly gain

* Reuters reports BOJ could raise rates as soon as September

(Updated at 1518 GMT(11:18 a.m. ET))

By Chris Prentice and Amanda Cooper

NEW YORK/LONDON, Aug 14 (Reuters) - U.S. and European shares

fell on Friday and oil prices gained as markets monitored tense

U.S.-Iran talks and digested new data that dented expectations

for a Federal Reserve rate hike next month.

Faltering talks to end the Iran war left oil and gas prices

poised for sizeable weekly gains. The U.S. threatened to ramp up

economic pressure on Iran, including extending a naval blockade.

U.S. consumer sentiment deteriorated in early August amid

the rising cost of living because of the Middle East conflict, a

survey showed on Friday.

The U.S. dollar and yields on U.S. Treasuries fell on a

surprise drop in U.S. retail sales. The data further reduced

expectations of a Federal Reserve rate hike at next month's

meeting.

The weaker dollar supported gold prices.

On Wall Street, the Dow Jones Industrial Average fell

85.82 points, or 0.16%, to 53,754.17, the S&P 500 fell

10.76 points, or 0.14%, to 7,788.23 and the Nasdaq Composite

fell 92.60 points, or 0.34%, to 26,710.43.

In Europe, the STOXX 600 gauge retreated 0.24% as

losses in the tech sector were broadly offset by gains in

capital-intensive shares such as defence and automakers.

Focus remains on the broad AI theme in the wake of strong

earnings that have helped soothe investor worries about massive

AI spending.

The MSCI All-World index, which is up for a

third straight week, reversed earlier gains and fell 0.26

points, or 0.02%, to 1,160.54.

MSCI's broadest index of Asia-Pacific shares outside Japan

closed higher by 0.29% to 1,640.08.

GEOPOLITICAL RISK

"The markets round out the week on a positive note, with

relatively thin event risk on the economic and corporate

calendar. But of course, it's a Friday, and the typical pattern

has been for geopolitical risks, or at least bombastic rhetoric,

to pick up between the U.S. and Iran going into the weekend,"

Capital.com strategist Kyle Rodda said.

"Currently, the geopolitical uncertainty remains the only

major macro roadblock to a market experiencing strong tailwinds

from earnings and the monetary policy outlook."

Brent crude futures rose to $87.68 per barrel, up

0.7% on the day, and U.S. oil prices rose 0.3% to $81.49.

John Sidawi, senior portfolio manager for fixed income at

Federated Hermes, said a puzzling feature of markets in recent

months has been the growing disconnect between geopolitical

uncertainty and asset price volatility.

"For now, markets appear willing to tolerate a significant

amount of uncertainty without demanding higher risk premiums.

However, this equilibrium is unlikely to be permanent," Sidawi

said.

"A meaningful escalation in conflict or a clear path toward

resolution could finally force investors off the sidelines,

potentially triggering a much larger volatility response than

current market pricing implies."

YEN STUCK IN INTERVENTION LOOP

In currencies, the yen strengthened 0.24% against the

greenback to 159.09 per dollar, after a Reuters report that the

Bank of Japan could raise rates as soon as September, according

to three sources familiar with policymakers' thinking.

However, it is still within sight of the 160 level that traders

think could trigger another bout of yen buying from Tokyo, after

a joint intervention with the U.S. last month failed to support

the Japanese currency.

The dollar index, which measures the greenback

against a basket of currencies including the yen and the euro,

fell 0.39% to 99.53, with the euro up 0.47% at $1.1581.

In commodities, spot gold rose 0.85% to $4,387.41 an

ounce.