Updated at 10:35 a.m. ET (1435 GMT

By Chris Prentice and Marc Jones

NEW YORK/LONDON, May 15 (Reuters) - Oil dropped over 2% on Thursday as a potential U.S.-Iran nuclear deal raised the prospect of increased global crude supply, and a recent stock market rally stalled.

The dive in crude nudged both the dollar .DXY and benchmark government bond yields, a proxy for national borrowing costs, lower.

U.S. Federal Reserve officials feel they need to reconsider the key elements around both jobs and inflation in their current approach to monetary policy, Chair Jerome Powell said during opening remarks at a two-day conference.

Brent futures LCOc1 dropped over 2.5% to $64.39 a barrel as U.S. President Donald Trump, in the midst of a Middle East tour, said he was getting close to securing a deal with Iran - and that Tehran had "sort of" agreed to the terms.

Ali Shamkhani, an adviser to Iran’s Supreme Leader Ayatollah Ali Khamenei, had said in an NBC interview that the country would commit to never making nuclear weapons and get rid of its stockpiles of highly-enriched uranium.

BNP Paribas economist Paul Hollingsworth said the drop in oil compounded the deflationary pressures already in play in places like Europe where U.S. tariff worries are lingering.

"Everyone is finding it difficult to navigate the volatility in the announcements," Hollingsworth said.

MSCI's gauge of stocks across the globe .MIWD00000PUS fell 0.4% to 871.03.

In Europe, the continent-wide STOXX 600 index .STOXX recovered from earlier losses that were led by the energy sector. It was up 0.2%.

April retail sales barely rose and jobless figures were steady, in key U.S. data releases.

On Wall Street, the Dow Jones Industrial Average .DJI and the S&P 500 .SPX both fell 0.4%, and the Nasdaq Composite .IXIC dropped 0.9%.

Retailer Walmart posted solid first-quarter sales numbers, but it became the latest to warn about the high costs of Trump's trade tariffs and did not provide second-quarter profit guidance due to the uncertainty.

"We may be entering a period of more frequent, and potentially more persistent, supply shocks," the Fed's Powell said.

Britain's economy grew by a quicker-than-expected 0.2% in March, data showed. Industrial production in the 20-nation euro zone also rose far more than predicted although overall first-quarter GDP growth disappointed.

The yield on the benchmark German 10-year Bunds DE10YT=RR fell 5.3 basis points to 2.639%. GVD/EUR

Yields on benchmark U.S. 10-year notes US10YT=RR fell 3.1 basis points to 4.497%, amid worries that Trump's budget package would add trillions of dollars to the U.S. debt. US/

DATA DELUGE

Investors were greeted with a plethora of good news earlier this week, from a U.S.-China trade-war truce to a raft of headline-grabbing investment deals from the Middle East during Trump's Gulf tour.

But most of the optimism had died down by Thursday, leaving MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS down 0.15%.

"We've had a huge party, everyone's hung over, and now we're just recuperating and waiting for the next big party," said Tony Sycamore, a market analyst at IG.

In currencies, the dollar was struggling to extend its strong gains made at the start of the week, with the dollar index =USD down 0.08% against a basket of major currencies.

The euro EUR= was up 0.08%.

Moves against the Korean won KRW= were particularly choppy for a second straight day, after news that South Korea's deputy finance minister Choi Ji-young met with Robert Kaproth, assistant secretary for international finance at the U.S. Treasury, to discuss the dollar/won market on May 5.

In commodities, spot gold XAU= regained its footing, up 0.7% to $3,200.59 an ounce. GOL/

(Additional reporting by Rae Wee in Singapore, editing by Ed Osmond and Rod Nickel)

((marc.jones@thomsonreuters.com; +44 (0)20 7513 4042; Reuters Messaging: marc.jones.thomsonreuters.com@reuters.net X/Twitter @marcjonesrtrs))