* Global markets rally, European Stoxx 600 up over 2%

* Oil sharply lower

* Bond yields tumble after relief rally on Wall Street on

Monday

(Updates throughout)

By Sophie Kiderlin and Gregor Stuart Hunter

LONDON/SINGAPORE, March 10 (Reuters) - Global stocks

rallied and oil prices fell sharply on Tuesday after U.S.

President Donald Trump declared the Middle East war could be

"over soon", although defiant comments from Iran's military

complicated hopes of a swift resolution.

Europe's STOXX 600 index was last up 2.2% after

declining for three consecutive trading days. MSCI's broadest

index of Asia-Pacific shares outside Japan rose

around 3.3%.

Brent oil futures fell as much as 11% to below $88.05 per

barrel at one point, before trimming their decline to about 9%.

Trump's remarks on Monday injected optimism that contrasted

with events in Iran, where hardliners rallied behind new Supreme

Leader Mojtaba Khamenei and the Revolutionary Guards said a

blockade of oil exports would continue until U.S. and Israeli

attacks end. Trump said the U.S. would hit Iran much harder if

it blocked exports.

The strong reaction to Trump's remarks "really does

highlight how the markets are literally hanging on every word he

says," Fiona Cincotta, senior market analyst at City Index

said.

However, uncertainty persists and further volatility could

lie ahead, she added.

"We're still sticking with this theme of volatility very

much. The markets remain volatile because they're still being

very much headline driven. And that obviously means that any

comments can send the market sort of one way or the other,"

Cincotta said.

Competing signals whipsawed global markets on Monday: oil

prices initially spiked and Wall Street stocks tumbled before

rebounding sharply after Trump's comments and reports suggesting

Washington may relax sanctions on Russian energy.

A GLOBAL REBOUND

Steadier investor sentiment triggered a global rebound in

shares on Tuesday, while government bond yields eased and

interest rate expectations shifted again.

European indexes followed Asia higher, with Germany's DAX

up 2.5% and France's CAC 40 adding around 2%.

Money markets cut the chances of a European Central Bank

rate hike this year, after this was more than fully priced in

late on Monday, while the benchmark German 10-year bond

fell almost two basis points to 2.8455%.

Rate-sensitive two-year yields fell more sharply, with

Germany's down nearly 5 bps. Britain's dropped 8 bps to 3.90%

after hitting 4.23% on Monday at the height of market worries

that surging oil prices would reignite inflation and prompt

central banks in Europe to tighten policy later this year.

"Market pricing suggests weeks of disruptions, not days or

months," analysts at BlackRock Investment Institute wrote.

"There's a risk of a stagflationary shock but it's not a given,

as market pricing indicates."

The yield on the U.S. 10-year Treasury note was

down 3 bps at 4.102%, even as traders pushed out bets on the

timing of the Federal Reserve's next rate cut, with the first

reduction now not seen until July, according to the CME Group's

FedWatch tool.

"We are still at troubling levels," ING analysts said,

referring to bond yields. "Expect nominal yields to fall for a

bit on a reversal trade. But don't expect a dramatic structural

rally in bonds," they wrote in a client note.

U.S. equity futures were last higher, with S&P 500 e-mini

futures EScv1 up 0.37%.

The U.S. dollar index, which measures the greenback

against a basket of six major peers, was last slightly lower at

98.58, extending Monday's sharp fall.

Gold was up 0.9% at $5,184.75, holding within its

trading channel of the past week, while cryptocurrencies rose,

with bitcoin adding 3% to $71,097.68 and ether up

2.1% at $2,068.94.