Updates to 16:01 EDT

By Stephen Culp

NEW YORK, Sept 11 (Reuters) -Wall Street reversed an earlier sell-off to close higher on Wednesday, and Brent crude prices rebounded from 3-1/2 year lowsas a keyinflation report cemented expectations that the U.S. Federal Reserve will issue a 25-basispoint rate cut next week.

Investors also parsed Tuesday night's U.S. Presidential debate to gauge potential policy shifts after the November election.

All three major U.S. stock indexes pulled a U-turn,transforming a sell-off into a rally by mid-afternoon. Tech stocks .SPLRCT, particularly chips .SOX, were clear outperformers, putting the Nasdaq ahead of the pack.

The Labor Department's Consumer Price Index (CPI) showed the annual inflation rate CPI shed 0.4 percentage points to a cooler-than-expected 2.5%. The core measure - which excludes food and energy - posted a hotter-than-expected monthly gain of 0.3%, and an annual increase of 3.2%.

"The inflation report kind of gave inflation bears a little something and it gave inflation bulls something," said Chuck Carlson, chief executive officer at Horizon Investment Services in Hammond, Indiana.

"At least initially today, there was the feeling that a 50-basis-point rate cut isn’t going happen," Carlson added. "Maybe now investors are starting to think that maybe that isn't a bad thing."

At last glance, financial markets have baked in an 85% probability that the Fed will cut its key policy rate by 25 basis points at next week's policy meeting, with a dwindling 15% chance of a double-sized 50 bp cut, according to CME's FedWatch Tool.

Market participants paid close attention to late Tuesday's U.S. presidential debate, listening closely for potential policy clues from Vice President Kamala Harris and former President Donald Trump.

The presidential hopefuls butted heads over abortion, the economy, immigration and Trump's legal woes at their rancorous first debate.

The Dow Jones Industrial Average .DJI rose 124.75 points, or 0.31%, to 40,861.71, the S&P 500 .SPX gained 58.6 points, or 1.07%, to 5,554.12 and the Nasdaq Composite .IXIC added 369.65 points, or 2.17%, to 17,395.53.

European stocks ended the session essentially flat as investors shifted their focus to the European Central Bank and its rate decision expected on Thursday.

The pan-European STOXX 600 index .STOXX rose 0.01% and MSCI's gauge of stocks across the globe .MIWD00000PUS gained 0.62%.

Emerging market stocks lost 0.37%. MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS closed 0.24% lower, while Japan's Nikkei .N225 lost 1.49%.

Yields on 10-year U.S. Treasury notes steadied from an earlier slump in which the benchmark rate touched its lowest level since June 2, 2023.

Benchmark 10-year notes US10YT=RR last fell 5/32 in price to yield 3.6609%, from 3.644% late on Tuesday.

The 30-year bond US30YT=RR last fell 12/32 in price to yield 3.9743%, from 3.954% late on Tuesday.

The dollar was nominally higher against a basket of world currencies after inflation data appeared to lock in a smaller, 25 bp interest rate cut.

The dollar index .DXY rose 0.08%, with the euro EUR= down 0.04% to $1.1015.

The Japanese yen strengthened 0.04% versus the greenback at 142.40 per dollar, while Sterling GBP= was last trading at $1.3042, down 0.28% on the day.

Oil prices steadied after Tuesday's sell-off as a drop in U.S. crude inventories and potential supply disruptions from Hurricane Francine balanced against concerns over softening global demand.

U.S. crude CLcv1 jumped 2.37% to settle at $67.31 per barrel, while and Brent LCOcv1 settled at $70.61 per barrel, up 2.05% on the day.

Gold prices dipped as hopes dimmed for a larger interest rate cut from the Fed at next week's policy meeting.

Spot gold XAU= dropped 0.2% to $2,512.30 an ounce.

Reporting by Stephen Culp; Additional reporting by Lawrence White in London; Editing by Alexandra Hudson, Nick Zieminski and Diane Craft

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