* European stocks set for biggest two-week drop in a year

* U.S. futures point to moderate falls after steep falls

in previous session

* Investors focus on oil prices, inflation risks

* Traders rapidly cut Fed rate cut wagers for the year

* Dollar stands tall, pushing yen to 20-month lows

(Retops and updates prices to European open, adds investor

quotes)

By Lucy Raitano and Ankur Banerjee

SINGAPORE/LONDON, March 13 (Reuters) - European stocks

fell on Friday as investors grappled with uncertainty over the

duration of war inIran, which has disrupted global energy

supplies and spurred inflation fears that have upended the

outlook for interest rates.

The price of oil - which has surged 40% since the onset of

the war - remained just above $100 per barrel at its highest

level since mid-2022.Prices moderated somewhat on Friday after

the U.S. issued a 30-day license for countries to buy sanctioned

Russian oil and petroleum products that were stranded at sea.

Europe's STOXX 600 fell 0.6% in early trading,

putting the index on track for a 6.1% fall in March so far - its

biggest two-week decline in a year.

U.S. futures were subdued, with S&P 500 e-minis off

0.1% following steep declines on Thursday that saw the S&P 500

close 1.5% lower.

Meanwhile the U.S. dollar has become the safe-haven of

choice during the tumult, putting most other currencies under

pressure. The dollar was set for a second consecutive week of

gains and is up 2.5% since the war broke out at the end of

February.

Wolf von Rotberg, equity strategist at Bank J. Safra Sarasin

in Zurich, said there was a sense of urgency in markets around

the duration of the conflict.

"If we don't make any progress and just have a status quo

for a prolonged period...that would obviously mean that oil

prices stay higher for longer, and we have a more pronounced

impact on the economy and on inflation," he said.

OIL PRICE DRIVING MARKET

Brent crude oil futures were last up 0.8% at $100.30

a barrel, while West Texas Intermediate crude was at

$95.98 a barrel. Both had hovered around $60 at the start of

2026.

Traders are trying to predict how long the disruption to oil

supplies will last, based on the latest news about the war.

"Headlines are coming at the market like water from a fire

hose, which is impacting the price of oil, and consequently,

financial markets," said Mitch Reznick, group head of fixed

income at Federated Hermes.

With Iran stepping up attacks across the Middle East as its

new Supreme Leader Mojtaba Khamenei vowed to keep the Strait of

Hormuz shipping lane closed, investors are bracing for a

prolonged conflict and higher oil prices.

The spectre of rising inflation has led markets to rapidly

reprice what they expect from central banks this year, with

traders now anticipating just 20 basis points of easing from the

Federal Reserve compared to 50 bps of cuts priced in last month.

Two-year Treasury yields, which typically move in step with

Fed interest rate expectations, scaled a six-month high on

Thursday.

"With the possibility of higher oil prices still elevated,

investors should be prepared for continued volatility and

potentially further downside in the near term," said Vasu Menon,

managing director of investment strategy at OCBC in Singapore.

SHIFTING RATES OUTLOOK

Jose Torres, senior economist at Interactive Brokers, said

the impact of rising oil prices on corporate margins, inflation

expectations, rate-cut prospects and yields is sparking

volatility, leaving participants with few places to hide.

"Indeed, sinking optimism about Fed rate reductions amid

strengthening cost pressures is weighing on traditional safe

havens such as silver, gold, and government debt."

The two-year note yield eased 2 bps to 3.74%

after hitting its highest level since August 22 on Thursday. The

yield has gained about 35 bps in the two weeks since the war

started.

Investor focus will switch to a slate of policy meetings

next week with the Fed, the Bank of Japan, the European Central

Bank and the Bank of England all due to meet, with most expected

to keep rates unchanged. The Reserve Bank of Australia is

broadly expected to hike rates next week.

The yen hit its weakest level since July 2024 at

159.69 per U.S. dollar on Friday as Japan warned that it was

ready to take action to protect against yen declines. It was

last at 159.41.

Analysts said the bar for intervention is higher this time

around as any intervention now could prove futile in the face of

the relentless dollar buying.

In currencies, the euro fell 0.5% to $1.14575, on

course for a weekly decline of nearly 1.4%. The dollar index

was at 100.1, set for about a 1% weekly advance.

Gold was 0.2% higher at $5,088.4 per ounce on Friday

but set for a 1% drop for the week.