US STOCKS-Wall St falls as higher yields threaten?AI-led rally

* Indexes down: Dow 0.9%, S&P 500 1.1%, Nasdaq 1.6%

* Applied Materials (AMAT) down after quarterly results

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

By Ragini Mathur and Utkarsh Hathi

May 15 (Reuters) - Wall Street's main indexes fell 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 4.58% - 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 2.4% to $108.28 a barrel after comments from U.S. President Donald Trump and Iran's foreign minister dented hopes of a quick end to the 2-1/2-month-old conflict in the Middle East.

At 10:05 a.m. ET, the Dow Jones Industrial Average fell 436.84 points, or 0.87%, to 49,626.62, the S&P 500 lost 84.88 points, or 1.13%, to 7,416.36 and the Nasdaq Composite lost 433.36 points, or 1.63%, to 26,201.86.

Eight of the eleven main S&P 500 sectors were in the red, with technology leading losses.

The CBOE Volatility Index, known as Wall Street's "fear gauge", rose 1.5 points to 18.8.

Friday's pullback came after another record-setting session on Wall Street, when optimism over artificial intelligence overshadowed concerns that disruptions to global energy supplies due to the Iran war could stoke inflation.

The Nasdaq was on track to erase its weekly gains as recently strong chip stocks came under pressure. Nvidia (NVDA) and AMD each fell more than 4%, while Intel (INTC) dropped 6.8%. The Philadelphia SE Semiconductor Index slid 4%.

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 other movers, Microsoft (MSFT) added 1.3%. Bill Ackman's hedge fund Pershing Square will disclose a new position in Microsoft (MSFT) later on Friday, the billionaire investor said.

Dexcom (DXCM) jumped 5.6%. 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.

Semiconductor equipment maker Applied Materials (AMAT) fell 2.3% even after forecasting third-quarter revenue and adjusted profit above Wall Street estimates. Airline stocks were broadly lower as surging oil prices weighed on the sector, with Delta Air Lines (DAL), United Airlines , Southwest Airlines (LUV), and Alaska Air (ALK) falling between 1.9% and 2.7%.

Declining issues outnumbered advancers by a 3.84-to-1 ratio on the NYSE, and by a 3.34-to-1 ratio on the Nasdaq.

The S&P 500 posted 8 new 52-week highs and 15 new lows while the Nasdaq Composite recorded 21 new highs and 85 new lows. (Reporting by Ragini Mathur and Utkarsh Hathi in Bengaluru; Editing by Devika Syamnath)