* German bond yields rise as US strikes dampen peace

hopes

* ECB policymakers, including Schnabel, signal likely

June hike

* Money markets price in 90% chance of June ECB hike, at

least two hikes by year end

LONDON, May 26 (Reuters) - Germany's 10-year bond yield

edged higher on Tuesday on concerns a Middle East peace deal may

still be some way off after the U.S. launched new strikes on

Iran, although it remained near a roughly seven-week low hit the

previous day.

U.S. and Iranian negotiators remain in talks to end the

three-month war that has severely disrupted Middle Eastern oil

and gas supplies and pushed global inflation higher.

Expectations of a breakthrough and a reopening of the Strait of

Hormuz had supported bonds in recent days.

But optimism was tempered overnight after the U.S. said it

had carried out what it described as defensive strikes in

southern Iran, suggesting any peace deal is not imminent.

"Some back and forth probably remains in the cards over the

coming days but ultimately hopes for a reopening of the Strait

of Hormuz prevail," said Commerzbank rates strategists in a

note.

Germany's 10-year yield was up 2 basis points at

2.972%, after falling almost 9 bps on Monday to 2.93%, its

lowest since April 8.

The 30-year yield was up 1 bp at 3.513% after

touching 3.484% on Monday, its lowest since April 9.

ECB TO HIKE?

The European Central Bank has kept interest rates on hold

for the past year but looks increasingly likely to raise them

next month as sharply higher energy costs have pushed inflation

well above its 2% target.

ECB policymaker Isabel Schnabel told Reuters that the

central bank should raise rates in June even if a peace deal is

struck, given the size and persistence of the energy shock.

Other policymakers have also recently made the case for

tighter monetary policy.

Money market traders are pricing in about a 90% chance of a

hike at the ECB's June meeting, while 57 bps of tightening is

priced by year-end, implying at least two quarter-point hikes.

Germany's two-year yield, which is sensitive to

changes in rate policy, was up 4 bps to 2.575%. It fell 10 bps

on Monday to 2.523%, its lowest since May 7.