By Katanga Johnson

WASHINGTON (Reuters) -U.S. stocks pared gains on Tuesday after manufacturing data showed expansion amid rising commodity prices and shortages of materials, while oil rose and global equities hit a record high as markets rode concerns of rising inflation.

The S&P 500 and the Dow rose, with the benchmark S&P 500 within 0.5% of its record high as investors cheered signs of an improving economy ahead of a week packed with major data they hope to cast light on the economic recovery.

The technology-focused Nasdaq Composite traded lower, falling 0.3% after an initial rise.

All three major indexes were trading off from larger gains notched earlier in the session, leaving U.S. stocks mixed.

The Dow Jones Industrial Average rose 54.63 points, or 0.16%, to 34,584.08, the S&P 500 lost 1.32 points, or 0.03%, to 4,202.79 and the Nasdaq Composite dropped 8.92 points, or 0.06%, to 13,739.82.

Overall, positive sentiment has pushed major indexes back toward all-time highs in recent weeks, analysts say, after data showing a jump in U.S. inflation prompted markets to stutter earlier in May. The S&P 500 closed on Friday before the U.S. Memorial Day holiday at its third highest level in history.

U.S. manufacturing activity picked up in May, the Institute for Supply Management (ISM) said on Tuesday as its index of national factory activity increased to a reading of 61.2 last month from 60.7 in April. Pent-up demand amid a reopening economy has boosted orders, but unfinished work has piled up because of shortages of raw materials and labor.

“Markets are letting the macroeconomic data lead the way with Treasury prices lower and yields higher after strong numbers this morning,” said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance in Charlotte, North Carolina, adding that news of oil supplies rapidly drawing down, which will lead to higher oil prices, has prompted traders.

“They are interpreting higher yields as a signal to sell technology holdings and buy cyclical companies in the Energy, Materials and Financials sector, which is what they’ve done so far today,” Zaccarelli said.

New U.S. jobs data on Friday should also give a firmer steer on near-term Fed policy action.

In advance of that, MSCI’s gauge of stocks across the globe rose 2.51 points or 0.35%, to 713.96, marking a new record high, led by broad gains across Europe’s indexes.

Analysts say this is another sign of strong economic growth.

OIL GAINS

Overnight, MSCI’s broadest index of Asia-Pacific shares outside Japan closed 0.52% higher, while Japan’s Nikkei lost 0.16%.

Oil prices, meanwhile, extended gains ahead of an OPEC+ meeting and on optimism that fuel demand will grow in coming months as the U.S. summer driving season gets under way. [O/R] U.S. crude recently rose 3.5% to $68.64 per barrel and Brent was at $71.15, up 2.64% on the day.

This week’s main event is Friday’s U.S. payrolls data, with markets looking for a signal from the Federal Reserve on when it will start tapering its bond-buying program. Median forecasts are that 650,000 jobs were added in May, but the outcome is uncertain following April’s unexpectedly weak 266,000 gain. Though U.S. inflation data last week exceeded estimates, another big miss on the jobs front would delay prospects for any wind-down of stimulus, analysts say.

Societe Generale strategist Sebastien Galy said he expected the jobs data to come in below or in line with consensus, but, given low levels of equity volatility, markets were primed for a jump on higher-than-expected numbers. As traders awaited clues on Fed direction, the dollar index fell 0.012%, with the euro up 0.08% to $1.2235 while the yield on U.S. 10-year government debt last fell 6/32 in price to yield 1.6113%, from 1.593%

The dollar index, which tracks the greenback versus a basket of six currencies, fell 0.247 points or 0.27%, to 89.784.

Concerns about global inflation have driven gold up 8% this month to comfortably above $1,900.

(Reporting by Katanga Johnson in Washington; Editing by Mark Heinrich and Alexander Smith)