* Nikkei retreats, Europe and Wall Street futures slip

* US military strikes Iran base, Kuwait reports attacks

* Core PCE inflation data to test Fed rate outlook

(Updates prices to Asia afternoon)

By Wayne Cole

SYDNEY, May 28 (Reuters) - Share markets slid in Asia on

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

Kuwaiti reports of missile attacks challenged optimism

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

threat for bonds and interest rates.

Oil prices bounced nearly 4% and Treasury yields climbed as

the hostilities added to conflicting signals over peace talks,

after President Donald Trump dismissed an Iranian report of a

deal to resume traffic through the Strait of Hormuz.

"Over the next two 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.

He 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."

The U.S. military said it had carried out new strikes

targeting an Iranian drone operation, while Tehran claimed it

had attacked a U.S. air base in Kuwait.

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

crude rebounded 3.6% to $97.71 a barrel, while U.S. crude

added 3.8% to $92.05.

Yields on 10-year notes rose 4 basis points to

4.526% 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 losing 1.4%, while

South Korean shares slid 3.2%. MSCI's broadest index of

Asia-Pacific shares excluding Japan fell 2.1%.

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 fell 1.2%, while

FTSE futures shed 0.9% and DAX futures 1.0%.

S&P 500 futures eased 0.3% and Nasdaq futures fell

0.8%.

INFLATION DATA TO TEST FED

Investor focus now shifts to U.S. data on personal

consumption expenditures (PCE), which include the Federal

Reserve's preferred measures of inflation.

The inflationary 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%, far above the Fed's 2%

target.

The pick-up has led more Fed board 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," analysts at NAB wrote 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% to 4.0% by year-end.

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

dollar, which was trading at 99.506 against a basket of

currencies, steady on the week.

The dollar crept to a four-week top on the yen at 159.65

, nearing the 160.00 barrier that has triggered

Japanese government intervention in the past.

The euro was 0.3% lower at $1.1590, though it has

some support from expectations that 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 1.8% to $4,374 an ounce

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

hedge against inflation risks.