* US inflation rises as expected in February, impacting

market sentiment

* Oil prices up as Middle East conflict raises concerns

over global energy trade and inflation

* Bond yield rise fuels overheating fears in private

credit and AI investments

(Updates to afternoon U.S. trading)

By Lawrence Delevingne and Amanda Cooper

BOSTON/LONDON, March 11 (Reuters) - Wall Street shares

fell but the dollar held firm on Wednesday, after data showed

U.S. inflation picked up as expected in February, although most

investor focus was squarely on the oil price and on the chances

that the U.S.-Israeli war on Iran could have a longer-term

impact on economic growth.

Data from the Labor Department showed the consumer price index

rose 0.3% in February, in line with forecasts and above

January's 0.2% increase. CPI rose 2.4% in the year to February,

also matching expectations, while the core rate, which excludes

food and energy prices, rose 2.5%, in line with forecasts.

On Wall Street, the Dow Jones Industrial Average fell

about 0.6%, the S&P 500 dropped 0.1%, and the Nasdaq

Composite was little changed.

The consumer price report does not capture the steep rise in

items such as gasoline since the outbreak of war in the Middle

East 12 days ago. Markets already show traders believe there is

a rising chance that most central banks' next move with interest

rates will be to hike.

"February's inflation numbers were heading in the right

direction, but then along came the conflict in the Middle East

and now the path is changing. Instead of deflation from energy,

we will get inflation. Food prices could show signs of inflation

acceleration as the fertilizer market is in chaos," Annex Wealth

Management chief economist Brian Jacobsen said.

Oil had another volatile day, although price movement was

muted compared to the record price swings of Monday's session.

The International Energy Agency will recommend the release of

400 million barrels of oil, the largest amount in IEA history,

three sources said on Wednesday, to rein in soaring prices.

Japan and Germany said they would start releasing some reserves.

Brent crude futures were last up around 4% at $91 a

barrel, having risen earlier by as much as 6% to almost $93.

The MSCI All-World index fell 0.2% and European

shares slid, leaving the STOXX 600 down 0.6%. MSCI's

broadest index of Asia-Pacific shares outside Japan

closed higher by 1%.

Investors remain 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.

The immediate concern is when the Strait of Hormuz, a critical

artery for 20% of global fuel supply, will again be safe for

traffic as threats to vessels have deterred ships from entering

it since the outbreak of the U.S.-Israeli war on Iran. Three

more vessels were struck by projectiles, while Iran's military

command said on Wednesday that the world should be prepared for

oil to hit $200 a barrel.

European Central Bank President Christine Lagarde said on

Tuesday the ECB would do everything to keep inflation under

control to avoid a repeat of the 2022 energy price shock.

Several ECB officials favor a wait-and-see approach before

taking action.

The euro fell around 0.3% to $1.157, while the pound

was little changed on the day at $1.341. The yen

weakened further, leaving the dollar up 0.5% at 158.9.

BOND YIELD SURGE ADDS TO OVERHEATING CONCERNS

The surge in bond yields this week, due to fears of

sustained energy-price pressures, has added to concerns over

other market segments being at risk of overheating, such as

private credit and the vast investments in AI projects.

Investors were also reminded of vulnerabilities within private

credit after a person close to JPMorgan Chase said on

Wednesday the bank had marked down the value of some loans held

by private-credit groups and was tightening lending to the

sector. Publicly-traded asset managers such as Blue Owl Capital

and Ares Management lost ground on Wednesday as

jitters were felt across the financials sector.

U.S. Treasuries fell again on Wednesday, pushing the yield on

the benchmark 10-year note up 8.2 basis points to

4.218%.