EMERGING MARKETS-EM stocks retreat from highs, FX subdued as US-Iran tensions flare up

* MSCI EM FX, stock indexes eye first day of declines this week

* Bank ​of Korea ⁠holds rates, signals hawkish stance

* South Africa central bank ​expected to deliver 25 bps rate hike

May 28 (Reuters) - Emerging market stocks and currencies took a breather on Thursday, with an index tracking equities retreating from ​record ‌highs as the U.S. and Iran traded fresh strikes, leaving a fragile truce and peace deal hopes hanging in the balance.

Iran's Revolutionary Guard targeted ⁠a U.S. airbase after the U.S. military carried out strikes on an Iranian ⁠drone operation, hours after President Donald Trump rejected ​a report he was close to a compromise deal with Tehran.

Oil prices jumped about 2%. Fears of energy-driven inflation have weighed on prospects for global economic growth, and prompted global central banks to reassess their stance on monetary policy.

"(The) Emerging market universe might be vulnerable ​to higher and ‌sharply higher energy prices were the conflict in the Middle East not to be resolved," said Jeremy Batstone-Carr, European strategist at Raymond James. "The key point relates to the extent to which local administrations are able to continue to subsidize fuel prices."

LONG RUN OF EM GAINS

MSCI's index tracking global EM stocks fell 0.9% from record levels, after marking its fifth consecutive session of gains on ​Tuesday - its longest run since the war began.

Assets have seesawed with developments in the Middle East, with the slightest hint of ‌optimism spurring rallies while setbacks have erased those gains.

Heavyweight South Korean shares retreated 0.5% from a record high. The central bank held interest rates steady at 2.50%, but indicated a split ‌within its board.

"There were two dissenters, and it sounds very much as if the Bank of Korea, like other central banks, is telegraphing its desire to tighten policy," Batstone-Carr added.

Taiwanese stocks ended 1.4% lower after hitting another record high earlier in the ​session.

On the FX front, the U.S. dollar climbed to a one-week high, with MSCI's currency gauge down 0.1%.

Most currencies in Asia fell, while South Africa's ‌rand was down 0.4% ahead of a local interest rate decision where the central bank is widely expected to hike rates by 25 basis points.

Local stocks declined 1.3%, on track for their third consecutive day of losses, partly pressured by falling gold prices.

Stocks in emerging ⁠Europe were ⁠mixed, with Hungarian shares down 0.9%, while Polish and Romanian benchmarks each traded up 0.1%.

Currencies ‌in the region were largely subdued versus the euro.

Elsewhere, Moody's on Wednesday revised its outlook on the Republic of Congo to "positive" from "stable", saying the country's renewed access ​to international capital markets and ​a prospective IMF programme had eased near-term default risks.

Markets in Turkey were closed for a ‌public holiday.

HIGHLIGHTS:

** IMF approves $695 million program funding for Sri Lanka

** PBOC tells Chinese banks to boost May lending as credit weakness persists, sources say

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For RUSSIAN market report, see (Reporting by Avinash P and Purvi Agarwal in Bengaluru; Editing by David Holmes)