(Updates prices)

* Markets lower chances of Fed September rate hike

* Brent crude falls about 2%

* Markets, economists still expect ECB to hike in September

By Samuel Indyk

LONDON, Aug 13 (Reuters) - Euro zone bond yields fell

modestly on Thursday as oil prices retreated and a series of

U.S. inflation data cooled expectations for a rate hike from the

Federal Reserve next month.

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

euro zone, was 2 basis points lower at 3.14%, but within its

recent range.

"Oil prices are of course a factor in bond prices because it

affects monetary policy to some degree," said René Albrecht,

analyst at DZ Bank.

"But we have seen declines in oil prices which didn't really

impact yields because since (Kevin) Warsh became Fed chair

you've had increase in Fed hiking probabilities."

Investors had been closely watching Wednesday's U.S. consumer

price inflation data, which showed benign underlying price

pressures, prompting markets to reduce the chances of an

interest rate hike from the Fed next month.

Financial markets were pricing in a roughly 35% chance of a

rate increase at the Fed's September 15 to 16 policy meeting,

down from about 50% on Tuesday.

The data was important for global markets given the size of

the U.S. economy and the influence of the Fed on other central

banks.

"The U.S. CPI figures released yesterday came in largely in

line with expectations, providing a bit of relief for fixed

income markets," said Jens Nærvig Pedersen, director, FX and

rates strategy at Danske Bank.

U.S. producer prices data on Thursday offered a similar picture.

Wholesale inflation was unchanged in July as goods prices

declined, though a rise in the cost of services suggested

inflation could remain elevated.

EYES ON ENERGY

Investors are still watching discussions between Washington,

Tehran and mediators on any end to the Iran war and the

potential reopening of the Strait of Hormuz, although a deal

appears to be out of reach with attacks on ships occurring this

week and both sides stepping up their rhetoric.

The stalemate is keeping oil prices elevated, although well

below their highs from May.

On Thursday, Brent was down about 1% to $88 per barrel,

although that was still up about 45% from its pre-war level.

Economists and investors polled by Reuters expect the European

Central Bank to raise interest rates once more next month, as

high energy prices push inflation further from the bank's 2%

target.

Markets are pricing in around a 90% chance of a

quarter-point rate hike at next month's meeting.

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

changes in interest rate expectations, was down about 1 basis

point at 2.765%.