GLOBAL MARKETS-Record high for stocks as Trump meets Xi, pound braces for UK leadership fight

* AI leads world stocks to third straight record high

* Dollar stands tall on rate hike wagers

* Oil above $100/barrel ​as Iran ⁠war impasse weighs

* Trump-Xi meeting likely to dominate investors' thoughts

LONDON, May 14 (Reuters) - AI fervour kept world stocks at record highs on Thursday as investors looked past rising borrowing costs, a high-stakes summit between U.S. President Donald Trump and China's Xi Jinping and a live ​political ‌crisis in Britain.

The pan-European STOXX 600 moved 0.5% higher and, with Wall Street futures pointing up too, MSCI's main world stocks index took its bounce from its Iran war lows to 15%.

Much of the focus was on ⁠Beijing where Xi had told Trump that trade talks were making progress. There had been a warningabout Taiwan ⁠too, but traders were hoping for deals on tariffs and on AI ​to keep that red-hot rally running.

Europe's other big story was the unfolding political crisis in Britain where Prime Minister Keir Starmer was expected to face a leadership challenge following a drubbing in regional elections last week.

Starmer’s tenuous position drove the UK’s 10-year borrowing cost as high as 5.130% on Thursday, its highest since the 2008 financial crisis, as traders braced for what is likely to be ​a bruising leadership battle.

The ‌pound, which has fallen almost 1% this week as the uncertainty has mounted, was a fraction lower at $1.3505 , although it had some help from news that Britain's economy unexpectedly grew in March.

"We must presume there is going to be a leadership challenge," Franklin Templeton's Global Investment Strategist Michael Browne said.

That will then feed the debate on how much room for manoeuvre a new UK leader would have to adopt more aggressive economic plans given the strains on the country's finances, Browne added.

"On the surface it doesn't look like there is much."

DOLLAR GETS A LIFT FROM ​INFLATION DATA

The U.S. dollar held on to its recent gains as investors wagered the Federal Reserve's next rate move would be a hike after a batch of hotter-than-anticipated inflation reports this week.

Figures on ‌Wednesday saw U.S. producer prices post their biggest gain since early 2022. Tuesday's consumer price data also showed annual inflationrising at its fastest pace in three years.

Combined with a still strong economy and labourmarket, traders are starting to price in a potential Federal Reserve hike ‌in the first half of 2027, although most economists continue to see a rate cut as the likely next move.

The two-year U.S. Treasury yield hovered near a 1-1/2-month high at 3.9708% in Europe, while the benchmark 10-year U.S. yield stood at 4.468%.

Germany's 10-year Bund yield was close to its recent multi-year highs at 3.082% and the euro bought $1.1716 amid expectations for a European Central ​Bank rate hike next month.

The yen,meanwhile, fetched 157.93 per dollar, keeping traders wary of fresh intervention by Tokyo after a recent flurry of sharp moves.

AI FLYING

Overnight, China's blue-chip stocks eased about 0.8% after hitting their highest level since ‌late 2021 at the start of the session, while the yuan rose to a three-year high against the dollar.

Charu Chanana, chief investment strategist at Saxo, said markets were boosted by the fact that the Xi-Trump meeting hadn't produced any new spats. "So far, that seems to be enough," Chanana said.

Franklin Templeton's Browne said he was hopeful for some "significant movement" on U.S.-China trade policy.

"It is going to ⁠be about technology ⁠and the development of tech - and all that will do is further fuel the AI bubble," he said.

That was playing out almost ‌everywhere. Japan's Nikkei hit a new all-time peak in Tokyo as data showed AI-linked demand was helping lift earnings for Japanese firms.

In South Korea, another of Asia's AI darlings - SK Hynix - was on the verge of joining the ​elite group of firms with a $1 trillion market cap ​having seen its stock surge over 200% this year.

Analysts, though, caution that elevated oil prices and the impasse in negotiations to end ‌the war in the Middle East could bring inflationary worries back into view.

Brent crude futures were at $106.5 a barrel in London, while U.S. West Texas Intermediate futures fetched $101.33 per barrel. Both are up roughly 50% since the Iran war erupted in late February.

"Markets are trying to run two playbooks at once: AI and earnings say buy growth, but geopolitics and energy prices are quietly re-writing the inflation trajectory in the background," said Saxo's Chanana. (Additional reporting by Ankur Banerjee in Singapore; Editing by Andrew Heavens)