* Oil pares gains on report IEA proposes largest ever oil

release from strategic reserves

* Shares rise on relief rally though market sentiment

fragile

* Dollar holds gains, yen on the cusp of 159 level

* U.S. inflation data due later on Wednesday

By Rae Wee

SINGAPORE, March 11 (Reuters) - Shares steadied on

Wednesday following a brief retreat in oil prices, but markets

remained anxious as contradictory signals from the U.S.-Israeli

war on Iran left investors struggling to gauge its impact on

global inflation and growth.

A short-lived pullback in oil came after the Wall Street

Journal reported that the International Energy Agency has

proposed the largest release of oil reserves in its history to

bring down crude prices, providing some relief to battered

global stocks while currencies and bonds were little changed.

Brent crude futures swung between gains and losses

to trade 0.2% higher at $87.89 per barrel, while U.S. crude

was little changed at $83.47 a barrel, having initially

fallen on the news.

The conflict in the Middle East kept investors nervous, as

the United States and Israel pounded Iran in what some called

the most intense airstrikes of the war, dashing some earlier

hopes of an imminent end to hostilities.

"This news on the strategic reserves being released is

welcomed by the market, because then, in the case of a short

conflict, there is enough oil to avoid any rationing or economic

impact," said Frank Benzimra, head of Asia equity strategy and

multi-asset strategist at Societe Generale.

"But it's going to remain uncertain... it's very, very

unpredictable."

Still, global stocks found some reprieve, with MSCI's

broadest index of Asia-Pacific shares outside Japan

up 1.6%, while the Nikkei rose 2.1%.

South Korea's Kospi advanced 3.2%.

U.S. stock futures also pushed higher after a mixed cash

session overnight, with Nasdaq futures and S&P 500

futures adding 0.4% each.

EUROSTOXX 50 futures slipped 0.3%.

Markets are on edge as the Middle East conflict threatens to

freeze global energy trade and ignite a price shock - a risk

that world leaders are scrambling to address.

Still, energy markets remain hostage to how long - and how

intense - the conflict becomes.

"Several major questions loom over the oil market's

trajectory. Chief among them is the timing of safe passage for

vessels through the Strait of Hormuz, a critical chokepoint for

global oil supply," said Kerstin Hottner, Vontobel's head of

commodities.

"Another concern is the possibility of infrastructure

damage... Even if major hostilities subside, the prospect of

ongoing low-level Iranian drone attacks on energy infrastructure

could prolong market instability into next year."

DOLLAR FEVER

The dollar held to its gains on Wednesday as investors

continued to assess the fallout from the war, with the greenback

proving the safe-haven asset of choice in the ongoing market

turmoil.

Against the yen, the dollar was up 0.1% at 158.25,

while the euro and sterling were nursing losses

and fetched $1.1624 and $1.3440, respectively.

"You have only one safe asset, which has been the U.S.

dollar," said SocGen's Benzimra.

"Even gold or Treasuries did not play this huge safe haven

role. In the case of Treasuries, because of the inflation

concerns, and in the case of gold, because we could see some

investors selling their gains in gold to offset some losses in

the equity market."

Bond markets have come under pressure over the past few

sessions on risks that the prolonged spike in energy prices

could stoke inflation and cause central banks across the globe

to turn more hawkish.

U.S. Treasuries steadied on Wednesday, with the yield on the

benchmark 10-year note little changed at 4.1460%,

while the two-year yield was at 3.5796%.

"The general tone of central banks will remain hawkish so

long as the threat of the war's inflationary implications

persist," said Thierry Wizman, global FX and rates strategist at

Macquarie Group.

"We would expect that this more hawkish disposition persists

even after hostilities end, largely because the data may

continue to point to inflationary pressures throughout the

period in which inflation may show up in the data."

February's U.S. inflation reading is due later on Wednesday.

In precious metals, spot gold was up 0.5% at

$5,215.60 an ounce.