*

Nikkei slips as yen climbs, Wall St futures dither

*

Markets imply 40% chance Fed cuts by 50 bps

*

Oil gains as Israel and Hezbollah trade blows

(Updates throughout)

By Dhara Ranasinghe and Wayne Cole

LONDON, Aug 26 (Reuters) - World stock markets turned

cautious on Monday as optimism that U.S. interest rates are

coming soon was tempered by concern over increased tensions in

the Middle East, with oil prices rising over 1.5%.

U.S. stock futures were a touch firmer ,

European shares were a tad weaker, and trading was

subdued with the London market closed for a UK public holiday.

Japan's blue-chip Nikkei stock index closed down almost 0.7%

as the yen firmed.

Israel and Hezbollah traded rocket salvos and airstrikes on

Sunday, stirring worries about possible oil supply disruptions

if the conflict escalated.

Both Brent and U.S. crude prices rose more

than $1, or 1.5%, with Brent trading at $80.35 a barrel, in a

sign of some unease among investors.

In a highly-anticipated speech to the Jackson Hole symposium

on Friday, Federal Reserve chief Jerome Powell said the time had

come to start easing policy and emphasised the central bank did

not want to see further weakening in the labour market.

Also speaking at Jackson Hole, European Central Bank chief

economist Philip Lane struck a more cautious note at the

weekend, saying the central bank was making "good progress" in

cutting euro zone inflation back to its 2% target but success

was not yet assured.

"Comparing the Fed to the ECB, the Fed is more focused on

the labour market and whether it has tightened too much," said

David Kohl, chief economist at Julius Baer in Frankfurt.

"This is still not the case with the ECB."

German business morale, meanwhile, fell for a third

consecutive month in August, a survey showed on Monday, pushing

back recovery hopes for Europe's largest economy.

The Ifo institute said its business climate index fell to

86.6 in August from 87.0 in July, though it came in above a

forecast by analysts polled by Reuters for a reading of 86.0.

A contrast in the U.S. and euro area rate outlooks was

playing out in government bond markets, with euro zone bond

yields edging up on Monday after Lane's comments, while U.S.

Treasury yields dipped .

The two-year U.S. Treasury yield was 2 basis points (bps)

lower at 3.89%.

Fed fund futures are fully priced for a

quarter-point cut at the Sept. 18 meeting, and imply a 38%

chance of a 50 bps move. The market also has 103 bps of easing

priced in for this year and another 122 bps in 2025.

The ECB has already started cutting rates, with a 25 bps

reduction in July, with a further two quarter point reductions

priced in by year-end.

NVIDIA AWAITED

In share markets, focus was already turning to the latest

earnings from AI-star Nvidia ( NVDA ), which reports on

Wednesday to sky-high market expectations.

The stock is up some 160% year-to-date, accounting for

around a quarter of the S&P 500's 18% year-to-date gain.

"Nvidia ( NVDA ) will beat consensus expectations, they always do,

but investors are so ingrained in seeing revenue come in $2

billion-plus above the analysts' consensus or we could easily

see a sell the news event," said Chris Weston, head of research

at broker Pepperstone.

That means Nvidia ( NVDA ) would have to report sales of $30 billion

or more and guidance for the third quarter of $33 billion or

above, he added.

Also in focus are U.S personal consumption and core

inflation data due on Friday, along with a flash reading on

European Union inflation. Analysts generally assume the data

will be benign enough to allow for rate cuts in September.

The dollar fell to a three-week low at 143.45 yen. It was

last down around 0.3% at 143.99 yen, having fallen

1.3% on Friday.

"We think the adjustment in the dollar reflects the

realities now," said Julius Baer's Kohl, referring to the scale

of U.S. rate cuts priced in by year-end.

The euro edged down slightly to $1.1174, but

remained just off a 13-month top. The Swiss franc firmed

to 0.8460 per dollar.

A softer dollar combined with lower U.S. bond yields to

underpin gold at $2,524 an ounce, near this month's

all-time peak of $2,531.60.