Sawt Falasteen - Oil prices higher, stocks mixed ahead of inflation report

Crude prices initially rose more than two percent on hardening rhetoric between the United States and Iran on the prospects for reopening the Strait of Hormuz, which is vital to the world's flow of petroleum shipments.

Oil contracts later gave up those gains, before resuming their climb, as investors' expectations of an agreement ebbed and flowed.

The Wall Street Journal also reported that the US military fired on a Panama-flagged ship, to stop it as it tried to get past the US blockade of Iranian ports.

"Crude oil has surged over the past few days as hopes of a US-Iran agreement that would fully reopen the Strait of Hormuz have faded," said Fawad Razaqzada, market analyst at FOREX.com.

But "we have also heard contradictory messages from Washington and Tehran", he said.

Wall Street stocks weakened as the session progressed. All three major indices ended lower, with the broad-based S&P 500 down 0.3 percent.

All eyes will be on Wednesday's consumer price index report for July.

"It's a wait-and-see day," said Sam Stovall of CFRA Research, who sees the most recent lackluster jobs data as denting the odds of an imminent interest rate hike.

Federal Reserve Chair Kevin Warsh has vowed to achieve price stability from today's elevated inflation level, but has not so far raised interest rates.

"I still think that Fed chair Walsh's hands are tied because of GDP, because of employment data," said Stovall, who expects the Fed to keep rates unchanged in September.

In European stock trading, Paris and London closed marginally lower while Frankfurt was higher.

Last week's report of a surprise loss of over 20,000 jobs in the US economy last month had eased fears of a Fed rate hike.

But the prospect of the Strait of Hormuz staying shut and oil prices remaining elevated has revived concerns over inflation and boosted the chances of higher interest rates.

"The Fed problem is becoming more awkward," said Patrick Munnelly at the Tickmill Group.

"Labor-market cooling can justify patience, but energy-driven inflation can undermine that patience if it lifts headline CPI, gasoline prices and household inflation expectations," he said.

- Key figures around 2010 GMT -

Brent North Sea Crude: UP 1.4 percent at $88.91 per barrel

West Texas Intermediate: UP 1.3 percent at $83.20 per barrel

New York - DOW: DOWN 0.3 percent at 53,791.85 (close)

New York - S&P 500: DOWN 0.3 percent at 7,728.20 (close)

New York - Nasdaq Composite: DOWN 0.6 percent at 26,445.45 (close)

London - FTSE 100: DOWN 0.2 percent at 10,844.19 points (close)

Paris - CAC 40: DOWN 0.1 percent at 8,714.94 (close)

Frankfurt - DAX: UP 0.3 percent at 26,391.42 (close)

Hong Kong - Hang Seng Index: DOWN 1.1 percent at 25,652.82 (close)

Shanghai - Composite: DOWN 0.8 percent at 3,934.09 (close)

Tokyo - Nikkei 225: Closed for holiday

Euro/dollar: DOWN at $1.1542 from $1.1543 on Monday

Pound/dollar: DOWN at $1.3506 from $1.3507

Dollar/yen: DOWN at 159.27 yen from 159.29 yen

Euro/pound: UP at 85.46 pence from 85.45 pence

Y.Zaher--SF-PST