* Japan's Nikkei jumps 3.6%, S.Korea's KOSPI surges 7.8%

* President Trump says peace deal could be signed this

weekend

* Dollar stabilises after overnight losses, Treasuries hold

onto gains

(Updates prices ahead of European markets open)

By Stella Qiu

SYDNEY, June 12 (Reuters) - Asian stocks extended a global

rally on Friday on hopes a Middle East peace deal may finally

materialise, while the dollar and bond yields dropped and oil

prices marked two-month lows, tempering inflation fears.

European bourses are set to open sharply higher, with

pan-region futures up 1.8%. Wall Street futures rose

about 0.2%, building on the strong rally from overnight.

All eyes are on the hotly awaited market debut of Elon

Musk's SpaceX, which has made history with the

biggest-ever initial public offering. The IPO raised a record

$75 billion, valuing the rocket and spacecraft manufacturer at

$1.77 trillion and making Musk the world's first trillionaire.

U.S. President Donald Trump said on Thursday that a peace

deal could be signed as soon as this weekend, hours after

threatening more strikes on Iran. He said negotiations with

Tehran had advanced to the highest levels of Iran's leadership

and had been approved by a broad coalition of regional powers.

Trump's remarks follow repeated bouts of optimism from the

president that have failed to yield a deal, keeping markets on

edge. In this case too, Iran countered that it had not reached a

final decision on an agreement.

Nonetheless, "this does look perhaps a bit more tangible

than we have had," said Ray Attrill, head of FX strategy at

National Australia Bank.

"If we hear something from Iran that sounds positive, the

odds (of a peace deal) are clearly going to flip quite

dramatically."

The deal, if confirmed, would be the most significant

diplomatic breakthrough yet to end the three-month-old war,

which sent global energy prices sharply higher. The European

Central Bank had to raise interest rates for the first time in

nearly three years on Thursday to nip war-driven inflation in

the bud.

Oil prices slumped to two-month lows on expectations of an

impending agreement. Brent crude futures dropped 1.8% at

$88.76 per barrel, having fallen nearly 3% overnight.

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

jumped 3.7%, led by a 7.8% surge in South

Korea's KOSPI. Japan's Nikkei rose 3.6%.

China's blue-chip CSI300 rose 1.5%, while Hong

Kong's Hang Seng gained 2%.

Overnight, Wall Street rallied with the three major indexes

registering their biggest daily gains since April 8, when the

U.S. and Iran agreed to a temporary ceasefire. The Nasdaq jumped

2.5%, helped by expectations of a strong market debut for Musk's

SpaceX.

"With a fixed offer price and a larger than usual retail

allocation, the early float is also likely to be held by a more

diverse and potentially less patient investor base, which could

amplify near-term volatility," said Hugh Lam, an investment

strategist at Betashares.

Treasuries held onto gains as hopes of a peace deal in the

Gulf led markets to trim bets of a rate hike from the Federal

Reserve this year. Pricing for a hike in October has come down

to 36% from 51%.

Two-year Treasury yields were steady at 4.073% on

Friday, having slumped 6 basis points (bps) overnight. Benchmark

10-year Treasury yields held at 4.4690%, after

falling almost 8 bps overnight.

The dollar stabilised after overnight losses. It rose 0.2%

to 160.20 yen, after retreating 0.4% in the prior

session. Traders are still on high alert for intervention from

Japanese authorities as the yen stays close to the 160 level

that many see as a line in the sand.

Precious metals retreated on Friday. Spot gold

slipped 0.7% to $4,183 an ounce, following a 3.5% jump

overnight, while spot silver also fell 0.9% to $66.72 an

ounce, after a 5.8% gain.