By Michael Connor
NEW YORK (Reuters) - The dollar edged up and U.S. Treasuries prices slipped on Tuesday as rising U.S. inflation drove speculation that the Federal Reserve, which is meeting this week, may raise interest rates sooner than global investors have been expecting.
Wall Street stocks rose modestly, reversing earlier declines, though investors kept a watch on the turmoil in Iraq as the Federal Reserve began its two-day policy meeting.
Stocks on world markets were mixed, with European issues up slightly, as new signs of possible takeover activity pushed up shares of major healthcare and pharmaceutical companies.
Oil traders, after initial calm on the absence of an escalation in the Iraq crisis overnight, continued to push prices higher.
The U.S. Labor Department said its Consumer Price Index rose 0.4 percent last month. The gain was the largest since February 2013 and topped expectations for a 0.2 percent rise, following a 0.3 percent advance in April.
"It was a much stronger print than the market was expecting and many are thinking that may lead to a more hawkish tone tomorrow,? said Michael Pond, head of global inflation-linked research at Barclays in New York.
Fed officials are expected to trim their bond-buying program further at the conclusion of their meeting on Wednesday, although the Fed is not expected to raise interest rates until mid-2015.
The U.S. dollar rose, with the dollar index .DXY up 0.16 percent. Against the Japanese yen JPY=, the dollar was up 0.28 percent to 102.12 yen.
"If the Fed decides to be less dovish, that could give a bid to the dollar," said currency strategist Sebastien Galy at Societe Generale in New York.
U.S. Treasuries' prices fell on the CPI data, which analysts said may give the Fed more confidence in quickening an end of its ultra-low interest rate regime.
Benchmark 10-year notes US10YT=RR fell 12/32 in price to yield 2.644 percent, up from 2.60 percent late on Monday. Thirty-year bonds US30YT=RR dropped 23/32 in price to yield 3.436 percent, up from 3.40 percent.
The Dow Jones industrial average .DJI was up 1.35 points, or 0.01 percent, at 16,782.36. The Standard & Poor's 500 Index .SPX was up 0.71 point, or 0.04 percent, at 1,938.49. The Nasdaq Composite Index .IXIC was up 11.76 points, or 0.27 percent, at 4,332.86.
Investors have been closely monitoring the situation in Iraq, worried that it could lead to sharply higher oil prices for an extended period. Iraq's Shi'ite rulers defied Western calls to reach out to Sunnis to defuse an uprising in the north of the country.
"The Iraq situation could continue to destabilize markets, and there are a lot of unknown factors that could keep oil prices elevated. That said, valuations for stocks are not alarmingly high, and there aren't many alternatives for investors," said Bernard Baumohl, a managing director at the Economic Outlook Group in Princeton, New Jersey.
An index of European shares .FTEU3 was up 0.3 percent, while the MSCI index of world stock markets ahead 0.01 percent.
Shire SHP.L jumped 3.5 percent, for the biggest boost for the FTSE 100 .FTSE, after sources told Reuters the healthcare group has hired investment bank Citi C.N as an adviser, expecting to receive takeover approaches.
Brent oil held steady above $113 per barrel on Tuesday as fears that violence in Iraq could hit exports offset thawing relations between Iran and the West that could boost that nation's output.
Brent crude for August delivery LCOc1 was up 59 cents to $113.63 per barrel. U.S. light crude CLc1 was off 34 cents to $106.57.
Gold eased with the dollar's gains. U.S. gold futures' most-active contract GCcv1 slipped $3.60 to $1,271.70 an ounce.
(Reporting by Michael Connor in New York; Editing by Leslie Adler)
