(Updates at 1030 GMT)

By Anna Pruchnicka

LONDON, April 18 (Reuters) - Euro zone bond yields

dipped on Thursday, pulling back slightly from recent highs, as

expectations of a June rate cut by the European Central Bank

held firm and a recent surge in oil prices showed signs of

losing steam.

ECB policymakers continued to line up behind a June interest

rate reduction, but markets now see just three rate cuts this

year, a big retreat from two months ago when between four and

five moves were expected.

That is in contrast to the United States, where the Federal

Reserve is re-evaluating the need for interest rate cuts this

year in the face of resilient economic data and ongoing strength

in the labour market.

Germany's 10-year bond yield, the benchmark for

the euro zone, was last 2 basis points (bps) lower at 2.45%. It

hit its highest level since late February on Tuesday, recovering

from a drop late last week when investors snapped up safe assets

on rising Middle East tensions.

Yields move inversely to prices.

Thursday's pullback in yields was likely a correction that

was also visible in the oil prices, said Althea Spinozzi, head

of fixed income strategy at Saxo Bank.

"If you look at yields on 10-year U.S. Treasuries, 10-year

bunds, 10-year gilts, they all remain in an uptrend and the

correction we are seeing is quite normal," Spinozzi said.

"Inflation is the main driver of the bond performance, and

we cannot ignore that all these CPI reports that we have seen

recently showed that CPI seemed to be a bit stickier."

Yields in Europe were also catching up with their

counterparts in the U.S. after strong demand at the 20-year note

auction drove yields lower, Spinozzi added.

The benchmark U.S. 10-year yield was down 1 bps

on Thursday at 4.5772%, after a 7 bp drop the day before.

Oil prices were little changed on Thursday after a

3% drop in the previous session.

Mohit Kumar, chief Europe economist at Jefferies, wrote in a

note that a further rise in oil prices remained the biggest

risk.

The German 2-year bond yield, most sensitive to

expectations for policy rates, was down 1 bps to 2.95%.

Italy's 10-year bond yield was last 3 bps lower

at 3.85%, after surging to its highest level since March 1 on

Tuesday.

Analysts will be watching for clues from a slew of central

bank speakers due during the day and also will be monitoring the

U.S. jobless claims data due later on Thursday.