GLOBAL MARKETS-Wall Street reverses losses, crude pares gains on reports of progress toward U.S.-Iran peace deal

* Crude drifts higher amid continued closure of the Strait of Hormuz

* US GDP revised lower, orders for capital goods unexpectedly drop

* Fed rate hike expectations rise as U.S. inflation data seen above target

* Dollar weakens against euro, yen (Updates to U.S. market open)

By Stephen Culp

NEW YORK, May 28 (Reuters) - U.S. stocks turned higher on Thursday and European shares pared their losses following reports that the United States and Iran have reached an agreement to extend the ceasefire and launch negotiations, after the two nations exchanged air strikes.

The S&P 500 and the Nasdaq reversed earlier losses, while European shares, though off session lows, remained sharply lower.

The agreement, reported by Axios, still needs the approval of U.S. President Donald Trump, and comes after Iran targeted a U.S. air base in Kuwait and the United States struck what Washington described as an Iranian drone complex near the Strait of Hormuz.

President Trump earlier rejected reports that Washington and Tehran had reached a compromise deal. A raft of economic data showed first-quarter U.S. GDP grew at a more sluggish pace than originally reported, the saving rate sank to its lowest level since June 2022, inflation continued to heat up, and new orders for core-capital goods - a barometer for corporate spending plans - unexpectedly dropped.

The combination of weak GDP and rising price growth presents the U.S. Federal Reserve, now under the Chairmanship of Kevin Warsh, with a dilemma regarding the central bank's monetary policy.

"What the numbers point to today is simply that we have a stagflation problem, and that's a big problem for the Fed," said Peter Cardillo, chief market economist at Spartan Capital Securities in New York. "We have growth that's not that strong and rising inflation, and that suggests that a Fed (interest rate) hike is getting closer to reality as opposed to a rate cut." The Dow Jones Industrial Average fell 50.09 points, or 0.10%, to 50,594.19, the S&P 500 rose 18.40 points, or 0.24%, to 7,538.76 and the Nasdaq Composite rose 53.37 points, or 0.21%, to 26,731.28.

European shares dropped as U.S.-Iran tensions weighed on sentiment and dimmed hopes for a near-term reopening of the Strait of Hormuz, the long-term closure of which could threaten the health of the global economy. MSCI's gauge of stocks across the globe fell 0.02 points, or 0.00%, to 1,122.26. The pan-European STOXX 600 index fell 0.48%, while Europe's broad FTSEurofirst 300 index fell 12.20 points, or 0.49%. Emerging market stocks fell 11.71 points, or 0.67%, to 1,727.42.

Oil prices were rose despite reports of peace talk progress amid ongoing worries of escalating tensions between the United States and Iran. U.S. crude rose 1.22% to $89.72 a barrel and Brent rose to $95.22 per barrel, up 1% on the day.

U.S. Treasury yields turned lower on the day following news of a potential interim deal between Washington and Tehran. The yield on benchmark U.S. 10-year notes fell 1.6 basis points to 4.465%, from 4.481% late on Wednesday. The 30-year bond yield fell 1.6 basis points to 4.9948% from 5.011% late on Wednesday. The 2-year note yield, which typically moves in step with interest rate expectations for the Federal Reserve, fell 0.8 basis points to 4.025%, from 4.033% late on Wednesday. The dollar edged lower against the euro and the yen in the wake of the largely disappointing economic reports. The dollar index, which measures the greenback against a basket of currencies including the yen and the euro, fell 0.23% to 99.07, with the euro up 0.2% at $1.1647. Against the Japanese yen, the dollar weakened 0.14% to 159.29. In cryptocurrencies, bitcoin fell 3.11% to $72,828.83. Ethereum declined 3.63% to $1,985.39. Gold prices pared earlier losses following the release of U.S. inflation data and reports of a U.S.-Iran ceasefire extension. Spot gold fell 0.01% to $4,456.53 an ounce. U.S. gold futures rose 0.15% to $4,454.90 an ounce.

(Reporting by Stephen Culp; Additional reporting by Amanda Cooper and Wayne Cole)