* Nikkei flat, Europe and Nasdaq futures slip

* U.S. military strikes Iran base, Kuwait reports attacks

* Core PCE inflation data to test Fed rate outlook

(Adds reports of attack on Kuwait, updates prices)

By Wayne Cole

SYDNEY, May 28 (Reuters) - Share markets faltered in

Asia on Thursday as news of a fresh U.S. military strike in Iran

and Kuwaiti reports of missile attacks challenged optimism on a

peace deal, while U.S. inflation data loomed as a threat for

bonds and interest rates.

Oil prices bounced 2% and Treasury yields edged higher as

the strike added to the conflicting signals over the talks after

President Donald Trump dismissed an Iranian report of a deal to

restore traffic through the Strait of Hormuz.

"Over the next 2 weeks, we expect either a deal for a new

ceasefire, or the current ceasefire will have collapsed with

active hostilities resuming," said Madison Cartwright, a senior

geo-economics analyst at CBA.

The U.S. military carried out new strikes targeting an

Iranian drone operation that posed a threat to U.S. forces and

commercial shipping in the Strait of Hormuz, a U.S. official

told Reuters, escalating tensions as efforts to end the conflict

dragged on.

Cartwright put a 70% probability on a deal being agreed,

while cautioning that the fate of the strait was up in the air.

"Insurance through the strait has become prohibitively

expensive and it's unclear how and at what price insurance will

be made available," he added. "It is also not clear if Iran will

charge a toll, or a toll by another name."

With transits of the strait still only at a trickle, Brent

crude rebounded 2.1% to $96.31 a barrel, while U.S. crude

added 2.3% to $90.68.

Yields on 10-year notes edged up 3 basis points

to 4.512% as the risk of oil staying high kept upward pressure

on inflation expectations.

It also took a little steam out of the tech-driven bull run

in stock markets, with Japan's Nikkei going flat, while

South Korean shares slipped 1.2%. MSCI's broadest index

of Asia-Pacific shares outside Japan lost 0.7%.

Reports from Japan suggested the government planned to issue

"bridging bonds" to fund flagship programmes aimed at boosting

investment in growth and economic security.

For Europe, EUROSTOXX 50 futures and FTSE futures

both shed 0.6%, while DAX futures eased 0.3%.

S&P 500 futures were little changed while Nasdaq futures

eased 0.2%.

INFLATION DATA TO TEST FED

The focus now shifts to U.S. data on personal consumption

expenditures (PCE), which include the Federal Reserve's

preferred measures of inflation.

The pulse from fuel is expected to lift the headline PCE to

a three-year high of 3.8%, while the core is forecast to rise

0.3% to an annual 3.3% and far above the Fed's 2% target.

The pick-up has led more Fed members to call for dropping

its easing bias, or even preparing for a rate hike.

"With inflation well above target but the growth impact of

the conflict still uncertain, the Fed faces genuine two-sided

risk," argued analysts at NAB in a note.

"We see that uncertainty as the argument for holding rates

through end-2027, whereas a firming in services core inflation

would sharpen the case for higher-for-longer and a sharp

moderation would shift attention to the emerging growth

headwinds."

Markets imply a 50-50 chance of a quarter-point rise in the

funds rate to a range of 3.75-4.0% by year-end.

The shift in Fed expectations has helped underpin the U.S.

dollar, which was trading at 99.352 against a basket of

currencies to be steady on the week.

The dollar crept to a four-week top on the yen at 159.57

, nearing the 160.00 barrier that has triggered

Japanese forex intervention in the past.

The euro was 0.1% lower at $1.1613, though it has

support from expectations the European Central Bank will hike

interest rates when it meets in June.

Speaking on Thursday, ECB Chief Economist Philip Lane

emphasised the importance of preventing the spike in energy

costs from feeding into higher inflation expectations.

In commodity markets, gold slid 1.3% to $4,395 an ounce

, having again seen scant support as a safe haven or as a

hedge against inflation risks.