(Recasts lede, adds comments, background)

* European stocks on track for biggest weekly rise since

early April

* Wall Street futures up; S&P set for eighth straight

weekly gain

* Markets price in over 50% chance of Fed rate hike this

year

By Stefano Rebaudo

May 22 (Reuters) - European stocks were set for their

biggest weekly gain since early April, while U.S. equities were

poised to record an eighth straight weekly advance on Friday,

although a great deal of uncertainty continued to surround

U.S.-Iran peace talks.

Iran's foreign minister met Pakistan's interior minister on

Friday to discuss proposals to end the U.S.-Israeli war, Iranian

media reported, with Tehran and Washington still at odds over

Tehran's uranium stockpile and controls on the Strait of

Hormuz.

The S&P 500 was on track for its eighth straight weekly

gain, driven by booming demand for AI-related stocks as

investors largely downplayed the potential economic fallout from

the Middle East conflict and the energy shock.

That strength was only partly mirrored in major European and

Asian stock indexes, which made some ground this week but lagged

behind the U.S. rally.

"Our view is that equities will likely move higher over the

medium term, based on a combination of strong earnings, oil

prices that stay contained enough to avoid a broader growth

shock, and a Federal Reserve that remains supportive," Mark

Haefele, chief investment officer at UBS Global Wealth

Management, said.

UBS forecasts Brent crude at $105 at the end of September

and $95 at year-end and believes "that the bar for a Federal

Reserve hike remains high."

MSCI's main world stocks index rose 0.21%.

Europe's STOXX 600 was up 0.43% and on track for a

weekly gain of 2.8%.

Nasdaq futures climbed 0.11% and S&P 500 futures increased

0.13%. The S&P 500 index edged 0.17% higher on Thursday

at 7,445.72, after hitting 7,517.12 last week, a fresh record

high.

MSCI's broadest index of Asia-Pacific shares outside Japan

rose 0.74%. Japan's Nikkei gained 2.8%,

led by artificial intelligence-related shares.

"Oil prices have also moved higher again as investors weigh

the risk that talks drag on or fall apart," said Matt Britzman,

senior equity analyst at Hargreaves Lansdown.

"The honest answer is that nobody really knows where these

negotiations are heading, but for now, markets are doing what

they often do when a potential geopolitical off-ramp appears -

tentatively moving as if the good news could be around the

corner."

OIL PRICES UP BUT WELL BELOW RECENT HIGHS

Brent crude futures rose 2.5% to $105.28 a barrel

but were set for a 3.8% drop for the week. They hit $126.41 in

late April.

Prolonged energy disruptions threaten to feed through to

prices across the globe, spurring traders to price in rate

hikes.

Markets are now pricing in a more than 50% chance of a rate

hike from the U.S. Federal Reserve by the end of the year,

according to the CME FedWatch tool, versus expectations of two

rate cuts before the war started.

That has lifted Treasury yields and boosted the dollar,

which has also benefited from safe-haven demand. The euro

was at $1.1614, close to the six-week low it hit on Thursday,

and is set for a 1% drop this month.

Against a basket of currencies, the dollar was up

0.18% at 99.37. The Japanese yen last fetched 159.11 per

dollar, perilously close to the crucial 160 level that traders

fear could bring Japanese authorities into the market again.

"Energy prices need to rapidly and quickly reverse, otherwise

the combination of fiscal spending and a capex boom is a recipe

for a lot of inflation, especially in the U.S.," said

George Saravelos, global head of forex research at Deutsche

Bank, after mentioning a global increase in fiscal spending and

AI investment.

Incoming Federal Reserve Chair Kevin Warsh "will have to

pick between adding volatility to front-end rates, and help the

dollar, or the back-end, and hurt the dollar, but he can't avoid

both," Saravelos said.

Fed rate hikes push up short-dated yields, while no action

by the central bank could boost long-dated borrowing costs as

markets price in more inflation over the long term.

The European Central Bank has been pricing three rate hikes

by year-end since March.

The dollar remained firm against the yen following an

intervention worth an estimated $65 billion from Tokyo just

weeks ago to shore up the currency. It was last up 0.1% at

159.125 yen.