* Investors expect Iran conflict and energy shock to

ease, supporting bond prices

* ECB officials, including President Lagarde, downplay

likelihood of multiple rate hikes

* Italian two-year yields rise more than peers due to

fragile finances and energy costs

By Amanda Cooper

LONDON, April 17 (Reuters) - Short-dated euro zone

government bond yields edged up on Friday, but were still set

for a third straight week of declines, as investors grew

increasingly optimistic that the Iran war and subsequent energy

shock may soon be over.

U.S. President Donald Trump expressed confidence that a deal

could soon be reached to end the conflict. He said the next

meeting between the United States and Iran could take place at

the weekend and an extension of a two-week ceasefire was

possible.

Denting bond prices on Friday, which drove up yields, has

been the strength in oil prices this week, which are on track

for a 3% gain. The effective closure of the Strait of Hormuz,

now under a U.S. blockade, has wiped out much of the available

crude in physical markets outside the Gulf.

Two-year German Schatz yields, which are more

sensitive to expectations for near-term rate decisions and

inflation than benchmark 10-year debt, were up 1.4 basis points

in early trading at 2.547%.

They are heading for a weekly decline of 6 bps but that

would still be around 50 bps higher than they were before the

war.

Money markets show traders now only see a 15% chance of the

European Central Bank raising interest rates at its April

meeting, down from closer to 80% at one point in

recent weeks, although the prospect of two rate hikes in 2026

remains comfortably priced in.

ECB officials, including President Christine Lagarde, were

out in force this week, talking down the possibility of a string

of rate hikes, which helped temper some of those market-based

expectations.

"With the June meeting still seven weeks away, a lot can

happen. However, without a renewed crisis escalation that pushes

oil prices sustainably above $100, we see better chances that

the ECB will hike by less than forwards predict," Commerzbank

rate strategist Christoph Rieger said.

German 10-year yields, which serve as the

benchmark for the broader euro zone, were up 1.5 bps at 3.048%.

They remained unchanged on the week and 40 bps above where they

were in late February when the war started.

Elsewhere, Italian two-year yields headed for a

third weekly decline, but were up 3 bps on the day at 3.835%.

Two-year BTP yields have risen more than most other

developed market bonds since the start of the war, surging 65

bps given Italy's already fragile government finances and a

hefty energy import bill.

Ten-year BTP yields climbed 1.1 bps to 3.819% ,

bringing their premium over Bunds to 77 bps. This

spread, which many investors view as a barometer of global risk

appetite, reached a nine-month high above 100 bps in late

March.