(Updates prices as of 0754 GMT)

By Tom Wilson and Stella Qiu

LONDON/SYDNEY, April 17 (Reuters) - World shares

steadied on Wednesday though investors stayed cautious at the

prospect of U.S. interest rates staying higher for longer, which

in turn pushed Treasury yields to five-month highs and buoyed

the dollar.

European shares eked out gains of 0.2%, after

notching their worst day in nine months a day earlier on

concerns over geopolitical tensions in the Middle East.

U.S. Federal Reserve Chair Jerome Powell said on Tuesday

that recent inflation data, with three months of upside

surprises, had not given policymakers enough confidence to ease

policy soon. The central bank may need to keep rates higher for

longer than previously thought.

Markets have already slashed bets on the number of U.S. rate

cuts this year to fewer than two, a sea change from about six

cuts predicted at the beginning of the year. The first rate cut

is still expected in September, although the market's confidence

in that has declined.

Tensions between Iran and Israel also kept a cap on riskier

bets, said Alexandre Marquis, senior portfolio manager at asset

manager Unigestion, who said markets had already priced in the

prospect of fewer rate cuts than previously hoped.

"Part of the disappointment was already in the price, with

the recent correction we have seen in the last few days," he

said.

The MSCI world equity index, which tracks

shares in 47 countries, was flat. U.S. stock futures

, meanwhile, slipped a smidgeon, after Wall Street had

fallen on Tuesday.

Powell's comments kept the dollar broadly steady,

which in turn rooted the Japanese yen near 34-year

lows.

Two-year Treasury yields retested 5% overnight,

while 10-years held near a five-month high on the

diminishing expectations of Fed easing this year.

Euro zone bond yields also continued to climb, trading near

a 1-1/2-month high. Germany's benchmark 10-year yield

was last 0.3 basis points higher on the day at

2.489%.

Earlier, MSCI's broadest index of Asia-Pacific shares

outside Japan rose 0.4%, after plunging more

than 4% in the past three sessions. Japan's Nikkei,

however, dropped 1.3% to its lowest in two months.

Still, Taiwanese shares outperformed regional stocks

with a gain of 1.6%, as chip-making giant Taiwan Semiconductor

Manufacturing Co ( TSM ) rose 2% ahead of its earnings report.

SLOW BUT STEADY GROWTH

The International Monetary Fund said on Tuesday the global

economy was set for another year of slow but steady growth, with

U.S. strength pushing world output through headwinds from

lingering high inflation, weak demand in China and Europe, and

spillovers from two regional wars.

Tensions in the Middle East are still running high. Israel

vowed to respond to Iran's weekend attack despite international

calls for restraint, although its war cabinet put off a meeting

to decide on its response until Wednesday.

The dollar index, which measures the greenback

against its major peers, was last at 106.39. The beleaguered yen

was last steady at 154.54 per dollar as the prospect of Japanese

government intervention in currency markets loomed, though so

far there has been no action from Tokyo beyond from verbal

warnings.

The New Zealand dollar gained 0.4% to $0.5902 after

first-quarter inflation data showed domestically driven price

pressures were surprisingly strong, adding to signs that the

last mile to get inflation back to target could be bumpy.

In commodities, oil prices slipped as demand concerns

outweighed heightened tension in the Middle East. Brent

futures fell 0.3% to $89.74 a barrel, while U.S. crude

dropped 0.4% to $86.05 a barrel.

Gold, seen as a safe haven, eased 0.1% to $2,379 per

ounce, slipping away from a record high of $2,431.29.