US STOCKS-Wall Street set to drop at open as yields jump on inflation worries

* Futures down: Dow 0.9%, S&P 500 1.2%, Nasdaq 1.7%

* Applied Materials (AMAT) down after quarterly results

* Dexcom (DXCM) climbs after plans to revamp board panel with Elliott (Updates before market open)

By Ragini Mathur and Utkarsh Hathi

May 15 (Reuters) - Wall Street indexes were headed for a sharply lower open on Friday, as inflation fears triggered by the Middle East conflict drove up Treasury yields and threatened to halt an AI-fueled rally.

The yield on 10-year Treasury notes, a benchmark for global borrowing costs, hit 4.56% - its highest level since May 2025.

Global bond yields also jumped as increasing evidence of economic damage from the Iran war prompted investors to assume interest rates will rise faster than expected and growth will suffer.

The odds of the U.S. Federal Reserve hiking interest rates by 25 basis points in December have more than doubled over the past week to about 40%, according to CME Group's FedWatch tool, after hotter-than-expected inflation readings signaled price pressures may prove harder to contain.

"Markets are reacting to some of the recent inflation data, which has maybe been a bit higher than expected and continued relative robustness in the economy," said Kiran Ganesh, Multi-Asset Strategist at UBS Global Wealth Management.

"And so markets are pricing in some risk that central banks might feel the need to hike interest rates."

Brent crude prices rose almost 3% to $109 a barrel as the Strait of Hormuz remained closed, intensifying concerns over global energy supplies. Negotiations to end the 2-1/2-month-old conflict between Iran and the U.S. showed no signs of progress.

The CBOE Volatility Index, known as Wall Street's "fear gauge" hit two-week highs, rising 1.91 points to 19.16.

At 08:31 a.m. ET, Dow E-minis were down 463 points, or 0.92%, and S&P 500 E-minis were down 90 points, or 1.2%. Nasdaq 100 E-minis were down 504.5 points, or 1.7%.

The pullback follows another record-setting session on Wall Street, with the S&P 500 and the Nasdaq closing at record highs. The Dow Jones Industrial Average reclaimed the 50,000 milestone, while the S&P 500 topped 7,500 for the first time.

Markets had earlier appeared to shake off inflation concerns tied to the Iran conflict, with enthusiasm around artificial intelligence powering a rally and keeping major indexes on track for weekly gains.

Investors also closely watched the U.S.-China summit, which wrapped up on Friday with no major breakthrough, after discussions between the two nations covered a sweeping agenda spanning trade, tariffs, Iran and Taiwan.

Among premarket movers, semiconductor equipment maker Applied Materials (AMAT) fell 1.8% even after forecasting third-quarter revenue and adjusted profit above Wall Street estimates.

Meanwhile, Nvidia retreated 2.5% after sharp gains in the previous session. U.S. Trade Representative Jamieson Greer told Bloomberg TV that chip export controls were not a major topic in China talks.

Dexcom (DXCM) jumped 6%. The medical device maker said it will appoint two independent directors and revamp a key board committee in collaboration with activist investor Elliott Investment Management.

Airline stocks were broadly lower as surging oil prices weighed on the sector, with Delta Air Lines (DAL) down 1.6%, while United Airlines, Southwest Airlines (LUV), and Alaska Air (ALK) fell between 1.5% and 2.1%.

(Reporting by Ragini Mathur and Utkarsh Hathi in Bengaluru; Editing by Devika Syamnath)