(Updated in New York morning time)

* Oil prices jump more than 6% as Middle East airstrikes

resume

* Markets fully price in Fed rate hike by September meeting

* US 10-year Treasury yield rises 2.45 basis points to

4.629%

By Karen Brettell

July 29 (Reuters) - U.S. stocks fell while oil prices and

Treasury yields climbed as fighting in the Iran war resumed,

just hours ahead of the Federal Reserve's highly anticipated

interest rate decision, due later on Wednesday.

The Fed is widely expected to hold rates steady, but traders

are pricing in roughly 34% odds of a hike as rising oil prices

reignite concerns about inflation that remains well above the

U.S. central bank's 2% annual target. Markets are now fully

pricing in a rate hike by the Fed's September meeting.

"The bottom line, from a market point of view, is if oil

prices remain elevated in September, the Fed will conclude the

oil shock has lasted long enough to demand a rate hike, or

hikes," said Chris Low, chief economist at FHN Financial. "The

market has also concluded some participants will make the case

for hikes today ... and there is a not-insignificant chance they

will convince a majority of the voters to back them."

Oil prices jumped more than 6% after major airstrikes resumed in

the Middle East, dashing hopes for an imminent end to the Iran

war. The rally was compounded by industry data showing a drop in

U.S. crude inventories.

Uncertainty over the outcome of Wednesday's Fed meeting is

also high due to Fed Chairman Kevin Warsh's preference for

offering less forward guidance on the Fed's likely monetary

path.

The yield on benchmark U.S. 10-year notes

rose 2.45 basis points to 4.629%, from 4.604% late

on Tuesday.

The Dow Jones Industrial Average fell 1.37% to

52,024.98, the S&P 500 fell 0.62% to 7,382.73 and the

Nasdaq Composite fell 0.83% to 24,670.21.

EARNINGS TO SET TONE

Investors are also awaiting a wave of key earnings, with

Microsoft ( MSFT ) and Meta due to report after the

market close, followed later this week by Amazon.com ( AMZN )

and Apple ( AAPL ).

Global markets have been volatile this month as investors

question the sustainability of the AI spending boom amid signs

that major U.S. companies are deepening a web of AI-linked

investments and continuing to funnel billions into the

technology at the expense of free cash flow.

"The pressure is shifting from spending plans to returns on

investment. Investors want evidence that AI capex is generating

revenues now, while also strengthening the future growth

outlook," said Gina Martin Adams, chief market strategist at HB

Wealth.

The scrutiny comes as competition from China intensifies,

both in the race to develop advanced chips and as Chinese firms

roll out cheaper AI models.

Expectations have grown so lofty that even a sixfold jump in

SK Hynix's ( SKHY ) quarterly profit fell short, sending its

shares tumbling 9.61%.

South Korea's KOSPI, which has become emblematic of

the wild swings in AI sentiment, fell nearly 6% a day after

sinking more than 10% to a three-month low.

In response, South Korea will introduce additional curbs on

single-stock leveraged exchange-traded funds, or ETFs, including

a cap that could limit an individual's investment in such

products to 20% of their total investment assets, the finance

ministry said on Wednesday.

The pan-European STOXX 600 index fell 0.21%, while

Europe's broad FTSEurofirst 300 index fell 0.28%.

The MSCI All Country World Price index

dropped 0.57% to the lowest since June 26.