* World shares drop off 5-month high
* Pound jumps on Brexit delay chances, FTSE suffers
* Indian markets hit by border tensions with Pakistan
* Oil markets steady after biggest fall of the year
* Wall Street waits for Fed signals
* Graphic: World FX rates in 2019 http://tmsnrt.rs/2egbfVh
By Marc Jones
LONDON, Feb 26 (Reuters) - Britain's pound hit a 21-month high against the euro on Tuesday on hopes for a delay to Brexit, while world shares took a breather after scaling a five-month peak.
Asia's rally on hopes of a U.S.-China trade deal had run into profit taking overnight and it was a bumpy morning for Europe as the pound's leap past 86 pence and above $1.32 /FRX shoved London's FTSE .FTSE down more than 1 percent. .EU
Wall Street futures were pointing lower .N and oil markets were trying to recover after new a blast from U.S. President Donald Trump at OPEC which triggered their biggest tumble of the year O/R , but it was the FX moves that dominated.
Pound bulls had latched onto reports that May was considering delaying the March 29 deadline for Britain's European Union exit, a day after the Labour opposition party shifted towards supporting a second referendum. broke cover with a slightly more nuanced plan, to give lawmakers a vote in two-weeks time that will include the option for a delay alongside ones to back a deal she hopes to have brokered with the EU or to leave the bloc on March 29 without any deal.
"The UK will only leave (the EU) without a deal on March 29 with explicit consent of parliament," May said.
"What we are seeing right now are the downside (Brexit) risks either being lowered or being priced out," said Nomura FX strategist Jordan Rochester.
The flip-side was a dollar near a three-week low against its main peers .DXY , as markets also waited on a testimony from Federal Reserve Chairman Jerome Powell that should shine more light on its pull back from further interest rate rises.
U.S. 10-year Treasury yields, which are the one of main drivers of global borrowing costs, were barely budged in the run up to the testimony at 2.66 percent which is also almost exactly where they begun the year. /US GVD/EUR
"Powell's testimony will be the focus for investors to gauge whether the bounce in risk markets since the start of the year and the loosening in financial conditions as a result, will have any impact on his outlook for Fed policy," Mohammed Kazmi, a portfolio manager at fund manager UBP said, adding he expected that it hadn't.
KASHMIR TENSIONS
Elsewhere, Indian markets were rattled by border tensions between India and Pakistan, both of which have nuclear arms. The broader NSE stock index .NSEI skidded, the rupee INR=D4 fell and bonds rose in a flight to safety. said its warplanes had struck a militant training camp inside Pakistan killing "a very large number" of fighters, though Pakistan officials denied there had been any casualties.
Australian shares .AXJO had lost 0.9 percent, weighed down by energy stocks as oil prices tumbled overnight, Japan's Nikkei .N225 stumbled 0.4 percent and Chinese shares closed down after surging on Monday on the U.S. trade hopes.
"China Trade Deal (and more) in advanced stages. Relationship between our two Countries is very strong. I have therefore agreed to delay U.S. tariff hikes. Let's see what happens?" U.S. President Trump had tweeted.
Tuesday's moves though saw MSCI's broadest index of Asia-Pacific shares .MIAPJ0000PUS dip 0.5 percent.
JPMorgan (NYSE:JPM) analysts had urged investors to curb some of their enthusiasm. "It is notable that 1) no new deadline date (on U.S. China trade talks) has been set and 2) there weren't any formal statements published from either side following the talks in Washington."
Investors will also keep an eye on a two-day U.S.-North Korea summit this week where Trump and Kim Jong Un will try to reach an agreement on Pyongyang's pledge to give up its nuclear weapons programme. will meet for a brief one-on-one conversation on Wednesday evening followed by a dinner, White House spokeswoman Sarah Sanders told reporters.
Financial markets were hit early last year when the two sides were exchanging aggressive rhetoric but the meetings have soothed the tensions and seen Trump firing his barbs elsewhere.
Oil traders were dealing with the fallout of one of those new targets, OPEC, after Trump had sent crude prices tumbling more that 3 percent with a fresh attack on the producer group again for keeping crude prices "too high".
Brent LCOc1 , the global oil benchmark, had clawed back around 50 cents to get back above $65 ahead of U.S. trading while U.S. West Texas Intermediate crude CLc1 inched up to $55.50.
"I don't think it will change anything in current OPEC supply policy," Petromatrix analyst Olivier Jakob.
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