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 ESc1, NQc1, European shares were a tad weaker .STOXX, 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% .N225 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 LCOc1, CLc1 rose more than $1, or 1.5%, with Brent trading at $80.35 a barrel, in a sign of some unease among investors. O/R

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 US10YT=RR, DE10YT=RR.

The two-year U.S. Treasury yield was 2 basis points (bps) lower at 3.89% US2YT=RR.

Fed fund futures 0#FF: 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. FEDWATCH

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.O, 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 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 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 JPY=EBS, 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 EUR=EBS, but remained just off a 13-month top. The Swiss franc CHF= firmed to 0.8460 per dollar. USD/

A softer dollar combined with lower U.S. bond yields to underpin gold at $2,524 an ounce XAU=, near this month's all-time peak of $2,531.60. GOL/

Reporting by Dhara Ranasinghe in London and Wayne Cole in Sydney; Editing by Mark Potter

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