By Marc Jones

LONDON, May 15 (Reuters) - Oil tumbled over 3% as a potential U.S.-Iran nuclear deal raised the prospect of increased global crude supply on Thursday, while stocks markets took a well-earned breather following their weeks-long recovery from April's trade war meltdown.

Brent futures LCOc1 dropped over $2 to $64 a barrel as U.S. President Donald Trump, in the midst of a Middle East tour, said he was getting very 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.

Iran is OPEC's third largest producer. It pumps around 3 million barrels of oil per day (bpd), or around 3% of total world output, but has been under strict sanctions since Trump quit the West's previous nuclear accord with Tehran in 2015.

It was not just Brent that was impacted. Europe's oil and gas stocks .SXPE toppled back almost 2% at one point, while government bonds of rival producers from Angola XS1819680528=TE to Nigeria XS2384704800=TE also took a hit.

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.

Key questions are now whether the trade war continues to moderate, how much pain has been caused and whether the volatility has driven a structural shift away from U.S. assets and the dollar.

"Clearly we are in a better state of the world than we were a few weeks ago, but we do think that some damage has been done," Hollingsworth said.

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

Traders also pushed Wall Street futures lower .N as key U.S. data including April retail sales and jobless figures showed the former barely rose and the latter were steady.

Retail giant Walmart posted solid first quarter sales numbers but it became the latest to warn over the high costs of Trump's trade tariffs and did not provide any Q2 profit guidance either due to the uncertainty.

"Even at the reduced levels announced this week, we aren't able to absorb all the pressure given the reality of narrow retail margins," Walmart chief executive Doug McMillon said.

Earlier numbers out of Europe had shown Britain's economy grew by a quicker-than-expected 0.2% in March. Industrial production in the 20-nation euro zone also rose far more than predicted although overall Q1 GDP growth disappointed.

That eased Germany's 10-year yield DE10YT=RR, the euro area's benchmark, down to 2.67%, albeit still close to a multi-week high hit the previous day. GVD/EUR

U.S. Treasury yields US10YT=RR were also sitting near a one-month top of just above 4.5%, in part due to worries over Trump's budget package that would add trillions of dollars to the U.S. debt. US/

"My overall concern is that we are not finding much out about the world after the tariffs were in place at the moment," Societe Generale's Kit Juckes said, referring to the main data surveys.

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, in moves that breathed new life into battered global stocks.

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% and Wall Street futures 0.5% weaker .N after a near 30% rebound in the Nasdaq since early April's trough.

"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.

While the trade deal between the U.S. and China gave markets reason to cheer, the absence of clarity over Trump's trade policies has left markets with a sense of lingering uncertainty over the global economic outlook.

The uninspiring U.S. data fed the concerns of a recession in the world's largest economy.

"We may be entering a period of more frequent, and potentially more persistent, supply shocks," Federal Reserve government Jerome Powell said in opening remarks at a two-day conference on the Fed's approach to monetary policy.

In currencies, the dollar was struggling to extend its strong gains made at the start of the week, falling 0.6% against the yen to 145.75. The euro EUR=EBS rose 0.2% to just under $1.12.

BNP Paribas' Hollingsworth said his bank's forecast was for euro-dollar to reach $1.20.

"We still view this as a structural shift out of dollar assets," he said. "It is a shift that is going to take place over a number of years."

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.

The Aussie dollar AUD=D3 also jumped overnight after data showed Australian employment blew past expectations. It was last at $0.6408.

Elsewhere, spot gold XAU= regained its footing in Europe to be 0.3% higher on the day at $3,188 an ounce. GOL/

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

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