* Middle East tensions remain in focus for bonds

* Markets trim 2026 ECB rate hike bets

* Weak euro zone economic data and lower US growth

estimates temper bond yield rises

(Updates for European afternoon trading)

LONDON, May 28 (Reuters) - Euro zone bond yields fell on

Thursday after Axios reported that the U.S. and Iran had reached

an agreement for a 60-day ceasefire that would see an end to the

blockade of the Strait of Hormuz and keep traffic through the

waterway unrestricted.

Axios reported U.S. President Donald Trump was yet to give

the agreement his final approval, but that a deal would mark a

significant diplomatic breakthrough a day after the United

States and Iran traded missile strikes.

The effective closure of the Strait since the outbreak of

the conflict has severely impacted global energy supplies,

pushing up oil prices and bringing higher inflation across the

globe.

Euro zone bond yields have jumped since the war began as

traders bet the European Central Bank would have to carry out as

much as 75 bps of hikes - three full increases - to tackle

inflation stemming from rising oil prices due to the Iran war.

Oil prices trimmed an earlier rise but were still up

slightly on the day.

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

the euro zone, fell 2 basis points to 2.968%. It had earlier

been higher on the day after the U.S. and Iran traded missile

strikes.

The report has provided markets with "cautious optimism",

according to Axel Rudolph, chief technical analyst at IG.

"Investor optimism remains tempered by uncertainty over

whether President Trump will give the deal his final approval,"

Rudolph said.

ECB RATE HIKE?

Money market traders slightly trimmed their expectations for

rate hikes from the ECB, although they were still pricing in

about a 90% chance of a hike next month.

Investors were last pricing in around 55 bps of tightening

from the ECB this year, from around 60 bps before the news.

The two-year German bond yield, which is sensitive to

ECB interest-rate expectations, fell 2.5 bps to 2.551%, having

been up about 1 bp earlier in the day.

The decision by the ECB to keep rates unchanged in April was

a close call for some policymakers as persistently high

inflation made it difficult to look through the energy-driven

price shock, the accounts of their latest meeting showed.

Consumer price inflation jumped to 3% last month. Data

scheduled for release next Tuesday is expected to show an even

bigger rise in consumer prices.

Soft U.S. economic data also helped bonds on Thursday,

pulling yields down.

Estimated U.S. growth for the first quarter was revised

lower on Thursday, while a closely watched measure of price

pressures came in largely in line with expectations.

The benchmark U.S. 10-year Treasury yield fell 2

bps at 4.461%.