* AI leads world stocks to third straight record high

* Dollar stands tall on rate hike wagers

* Oil above $100/barrel as Iran war impasse weighs

* Trump-Xi meeting likely to dominate investors' thoughts

(Updates after start of European trading)

By Marc Jones

LONDON, May 14 (Reuters) - AI fervour kept world stocks

at record highs on Thursday as investors looked past rising

borrowing costs, a high-stakes summit between U.S. President

Donald Trump and China's Xi Jinping and a live political crisis

in Britain.

The pan-European STOXX 600 moved 0.5% higher and,

with Wall Street futures pointing up too, MSCI's main world

stocks index took its bounce from its Iran war

lows to 15%.

Much of the focus was on Beijing where Xi had told Trump

that trade talks were making progress. There had been a

warningabout Taiwan too, but traders were hoping for deals on

tariffs and on AI to keep that red-hot rally running.

Europe's other big story was the unfolding political crisis

in Britain where Prime Minister Keir Starmer was expected to

face a leadership challenge following a drubbing in regional

elections last week.

Starmer's tenuous position drove the UK's 10-year borrowing

cost as high as 5.130% on Thursday, its highest

since the 2008 financial crisis, as traders braced for what is

likely to be a bruising leadership battle.

The pound, which has fallen almost 1% this week as the

uncertainty has mounted, was a fraction lower at $1.3505

, although it had some help from news that Britain's

economy unexpectedly grew in March.

"We must presume there is going to be a leadership

challenge," Franklin Templeton's Global Investment Strategist

Michael Browne said.

That will then feed the debate on how much room for

manoeuvre a new UK leader would have to adopt more aggressive

economic plans given the strains on the country's finances,

Browne added.

"On the surface it doesn't look like there is much."

DOLLAR GETS A LIFT FROM INFLATION DATA

The U.S. dollar held on to its recent gains as investors

wagered the Federal Reserve's next rate move would be a hike

after a batch of hotter-than-anticipated inflation reports this

week.

Figures on Wednesday saw U.S. producer prices post their

biggest gain since early 2022. Tuesday's consumer price data

also showed annual inflationrising at its fastest pace in three

years.

Combined with a still strong economy and labourmarket,

traders are starting to price in a potential Federal Reserve

hike in the first half of 2027, although most economists

continue to see a rate cut as the likely next move.

The two-year U.S. Treasury yield hovered near a

1-1/2-month high at 3.9708% in Europe, while the benchmark

10-year U.S. yield stood at 4.468%.

Germany's 10-year Bund yield was close to its recent

multi-year highs at 3.082% and the euro bought $1.1716

amid expectations for a European Central Bank rate hike next

month.

The yen,meanwhile, fetched 157.93 per dollar,

keeping traders wary of fresh intervention by Tokyo after a

recent flurry of sharp moves.

AI FLYING

Overnight, China's blue-chip stocks eased about

0.8% after hitting their highest level since late 2021 at the

start of the session, while the yuan rose to a

three-year high against the dollar.

Charu Chanana, chief investment strategist at Saxo, said

markets were boosted by the fact that the Xi-Trump meeting

hadn't produced any new spats. "So far, that seems to be

enough," Chanana said.

Franklin Templeton's Browne said he was hopeful for some

"significant movement" on U.S.-China trade policy.

"It is going to be about technology and the development of

tech - and all that will do is further fuel the AI bubble," he

said.

That was playing out almost everywhere. Japan's Nikkei

hit a new all-time peak in Tokyo as data showed

AI-linked demand was helping lift earnings for Japanese firms.

In South Korea, another of Asia's AI darlings - SK Hynix

- was on the verge of joining the elite group of

firms with a $1 trillion market cap having seen its stock surge

over 200% this year.

Analysts, though, caution that elevated oil prices and the

impasse in negotiations to end the war in the Middle East could

bring inflationary worries back into view.

Brent crude futures were at $106.5 a barrel in

London, while U.S. West Texas Intermediate futures fetched

$101.33 per barrel. Both are up roughly 50% since the

Iran war erupted in late February.

"Markets are trying to run two playbooks at once: AI and

earnings say buy growth, but geopolitics and energy prices are

quietly re-writing the inflation trajectory in the background,"

said Saxo's Chanana.

(Additional reporting by Ankur Banerjee in Singapore; Editing

by Andrew Heavens)