GLOBAL MARKETS-Stocks edge up, dollar falls as Trump's Iran deadline nears

By Sinéad Carew and Lawrence White

NEW YORK/ LONDON, April 7 (Reuters) - Wall Street's main equity indexes managed tiny gains on Tuesday while the dollar lost ground and U.S. Treasuries fell as investors braced for the outcome of a standoff between the U.S. and Iran.

U.S. President Donald Trump issued Iran an ultimatum, threatening to destroy every bridge and power plant in the country if Iran does not reopen the Strait of Hormuz by the end of Tuesday. Iran had said that it would retaliate against U.S. allies in the Gulf, whose desert cities would be uninhabitable without power or water.

Trading was cautious during the day, but stocks regained some steam during the Wall Street session's last hour as investors took some hope from Pakistan's Prime Minister Shehbaz Sharif's announcement on X that Middle East diplomatic efforts were progressing.

Pakistan, which has been mediating between the warring countries, urged Trump to extend his deadline for two weeks and Iran to open the Strait for the same timeframe.

A senior Iranian official told Reuters that Tehran was positively reviewing Pakistan’s proposal. The White House said Trump was aware of Pakistan's proposal and that a response would come.

After a choppy session for oil, which has been beset by supply worries, U.S. crude futures settled slightly higher near $113 per barrel, while Brent finished down slightly.

HEADING FOR THE SIDELINES

Investors have been laser-focused on the U.S.-Israeli war with Iran, which is now in its sixth week, as wild volatility in oil prices increased concerns about inflation and a potential global economic slowdown. Wall Street indexes fell modestly on Tuesday, having made little progress in recent days, as hopes for a quick resolution to the war were replaced by nervous uncertainty ahead of Trump's deadline.

"It's leading most investors to head to the sidelines because why sell everything if this is headed for resolution and why buy something if you could be seeing a very significant decline in a matter of days?" said Rick Meckler, a partner at Cherry Lane Investments in New Vernon, New Jersey.

Meckler said if Trump carried out his threat it would usher in a very bearish period for markets.

"There's no clear play here unless as an investor you've decided you're relatively certain where this is headed," he added.

On Wall Street, the Dow Jones Industrial Average .DJI fell 85.42 points, or 0.18%, to 46,584.46, while the S&P 500 .SPX rose 5.02 points, or 0.08%, to 6,616.85 and the Nasdaq Composite .IXIC rose 21.51 points, or 0.10%, to 22,017.85. During the day, the benchmark S&P 500 had fallen more than 1%.

MSCI's gauge of stocks across the globe .MIWD00000PUS rose 0.43 points, or 0.04%, to 998.09.

Earlier, the pan-European STOXX 600 .STOXX index finished down 1.01%, while Europe's broad FTSEurofirst 300 index .FTEU3 fell 24.68 points, or 1.04%.

CBOE's volatility index .VIX, sometimes referred to as Wall Street's fear gauge, closed up 1.6 points at 25.78, paring earlier gains from a session high of 28.

Iran has effectively closed the Strait of Hormuz, a global transit chokepoint through which roughly a fifth of oil and gas is shipped, since the start of the war on February 28. Tehran has pushed back against U.S. pressure to reopen the strait, saying it wants a lasting end to the war instead of a temporary ceasefire.

The U.S. Energy Information Administration said on Tuesday fuel prices could keep rising for months even after the strait reopens, in contrast with Trump's assurances that consumers will see immediate relief when the war ends.

Oil prices were mixed, with U.S. crude CLc1 settling up 0.48%, or 54 cents, at $112.95 a barrel after earlier touching $117.73. Brent LCOc1 settled at $109.27 per barrel, down 0.46%, or 50 cents, on the day.

CONFLICT TRIGGERS ECONOMIC FEARS

Inflation concerns have upended the global rates outlook, with traders no longer pricing in any rate cuts from the U.S. Federal Reserve this year.

Chicago Federal Reserve Bank President Austan Goolsbee said he is worried that the war will drive inflation higher even as it slows the U.S. economy, putting the Fed in an uncomfortable position where there is no obvious "cookbook" for what to do.

U.S. Treasury yields were little changed as investors were wary of making big bets.

"I don't think anybody really wanted to buy Treasuries with the chance that oil could go to $150 (a barrel), and that's the scary part of this whole thing. They should be buying Treasuries as a safe-haven bid, but for the most part, it's very tough to do with the chance that oil could accelerate," said Tom di Galoma, managing director of global rates trading at Mischler Financial Group.

The yield on benchmark U.S. 10-year notes US10YT=RR fell 3 basis points to 4.305%, from 4.335% late on Monday, while the 30-year bond US30YT=RR yield fell 0.6 basis points to 4.8836%.

The 2-year note US2YT=RR yield, which typically moves in step with interest rate expectations for the Federal Reserve, fell 4.8 basis points to 3.802%.

In currencies, the U.S. dollar lost ground after trading close to its highest levels in almost 11 months for much of the day.

The dollar index =USD, which measures the greenback against a basket of currencies including the yen and the euro, was last down 0.35% at 99.65.

The euro EUR= was up 0.49% at $1.1598, while against the Japanese yen JPY=, the dollar weakened 0.05% to 159.6.

In precious metals, spot gold XAU= rose 1.43% to $4,713.86 an ounce while spot silver XAG= rose 0.34% to $73.04 an ounce.