(Updates prices throughout)

* Hopes of Strait of Hormuz opening lift risk assets

* Nikkei surges to record high, US stock futures gain

* Dollar stumbles as investors move out of safe haven;

oil slides

* Conflicting messages on peace deal keep enthusiasm

grounded

By Nell Mackenzie and Ankur Banerjee

LONDON/SINGAPORE, May 25 (Reuters) - Stocks surged and

the U.S. dollar and oil prices slid on Monday as the prospect of

a deal to end the Iran war buoyed risk appetite, although a lack

of clarity over when the Strait of Hormuz would open kept

enthusiasm in check.

The nearly three-month-long conflict in the Middle East has

driven energy prices sharply higher and reshaped the global

rates outlook, as inflation concerns intensify following

Tehran's effective shutdown of the key strait.

U.S. President Donald Trump said on Sunday he had told his

representatives not to rush into any deal with Iran and his

administration played down hopes of an imminent breakthrough.

Just a day earlier, Trump said Washington and Iran had

"largely negotiated" a memorandum of understanding on a deal

that would reopen the waterway, which carried one-fifth of

global oil and liquefied natural gas shipments before the war.

Chris Weston, head of research at Pepperstone, said markets

have become less focused on the timing of a resolution and

instead been keeping an eye on the tone of the headlines.

"The tone has been consistently towards some sort of

resolution... We've become very patient for a resolution

deadline," he said.

Stock markets brushed off comments from Iran's foreign ministry

spokesperson on Monday saying that while many topics had been

agreed, this did not mean Tehran is close to signing a peace

deal.

The pan-European STOXX 600 climbed around 1% to

631.1, while Nasdaq futures were 1.4% higher and S&P

futures were up 1%. However, liquidity was likely to be

thin, with several markets including in Britain and the United

States closed for public holidays.

The euro zone government bond market was on a tear, with

Germany's 10-year government bond yields hitting their lowest

since April 8, last down almost 10 basis points while Italy's

10-year yields fell to their lowest since April 17.

OIL PRICE SETS THE TONE FOR MARKETS

For much of the year, oil prices have steered broader

markets, as investors sift often conflicting signals from

Washington and Tehran since a fragile ceasefire took hold in

April.

On Monday, oil prices hit two-week lows, with Brent crude

futures down over $5, or about 4.9%, to $98.45 a barrel,

while U.S. West Texas Intermediate was at $91.67 a

barrel, also down about 4.9%.

Analysts expect oil prices to stay elevated even if there is

a resolution in the near term, and they are unlikely to return

to levels before the war as it will take time to remedy supply

chain disruption from the conflict.

Last week, Barclays ( BCS ) maintained its 2026 average Brent crude oil

price forecast at $100, though it said risks are skewing higher.

The euro was up 0.3% at $1.1640, while the Japanese yen

firmed to 158.91 per U.S. dollar as the safe-haven dollar gave

up some of its recent gains.

In Asia, Japan's Nikkei jumped roughly 3% to roar

past the 65,000 level for the first time and Taiwan stocks rose

to 43,644, both closing at record highs.

Global stocks have mostly shrugged off war worries to focus

instead on all things AI and a strong earnings season, which has

pushed equities to record highs through the year.

RATE EXPECTATIONS RESET

The increase in energy prices since the conflict began and the

risk that prolonged disruptions will keep them high has prompted

traders to bet on rate hikes across both developed and emerging

markets.

Markets are now fully pricing in a 25-basis-point hike from

the U.S. Federal Reserve in January 2027, a sharp shift from

expectations before hostilities erupted in late February, when

two rate cuts this year were anticipated.

The 30-year Treasury bond's yield, which is seen

as a barometer of geopolitical and fiscal risk, briefly touched

its highest level since July 2007 last week, but has pulled back

from that milestone. There was no cash trading on Monday, but

30-year futures were up a full percentage point.

Data on Friday showed U.S. consumer sentiment fell to a record

low in May as surging gasoline prices linked to the Iran war

intensified affordability concerns just as Kevin Warsh was sworn

in as chair of the Fed.

"For the Federal Reserve, this creates a difficult balancing

act," said Bruno Schneller, managing partner at Erlen Capital

Management.

On the one hand, consumers feel the pinch of higher

financing costs, lower income growth and softer hiring, but on

the other, inflation remains high, Schneller said.

(Reporting by Nell Mackenzie in London and Ankur Banerjee in

Singapore; Additional reporting by Ruth Chai in Singapore;

Editing by Amanda Cooper, Gareth Jones and Gus Trompiz)