(Updates with European morning trading)

* Money markets price 30 bps of ECB tightening by year-end

* German 10-year Bund yield falls 2.5 bps at 2.925%, its

lowest since April 8

* The Federal Reserve is widely expected to leave rates

unchanged on Wednesday

By Samuel Indyk

LONDON, June 16 (Reuters) - Euro zone government bond yields

fell for a fourth day on Tuesday, hitting multi-week lows,

following a preliminary agreement between the U.S. and Iran to

end their war and reopen the Strait of Hormuz.

News of the agreement to reopen the waterway, through which

one-fifth of the world's oil and gas usually flows, has pushed

front-month Brent crude futures to their lowest level

since March 4.

Lower energy prices have dampened worries about higher

inflation and slowing growth, and helped reduce expectations for

further policy tightening from major central banks, including

the European Central Bank.

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

the euro zone, was down 2.5 basis points at 2.925%, its lowest

since April 8. Italy's 10-year yield was down 4 bps

at 3.639%, its lowest since March 18.

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

changes in ECB rate expectations, was down 1.5 bps at 2.554%

after falling to a two-week low of 2.547% on Monday.

ECB HIKE EXPECTATIONS TRIMMED

Last week, the ECB was the first major central bank to tighten

policy since the outbreak of the war, followed by a Bank of

Japan rate hike earlier on Tuesday.

Investors, however, have trimmed their expectations for

further hikes from the ECB following the peace deal, even though

the details of the deal are unclear. Money market futures are

fully pricing in 30 bps of tightening by the end of the year,

implying one quarter-point hike and around a 20% chance of

another.

"The (Middle East) deal probably gives the ECB cover to skip

the next meeting and buys them time to evaluate things," said

Lauren Van Biljon, senior portfolio manager at Allspring Global

Investments.

"The ECB are tightening this year, they might have to unwind

this in 2027 and maybe that's when we see yields really converge

back to where they were at the end of last year, beginning of

this year."

Germany's 10-year yield is still up almost 30 bps from its

pre-war level of 2.65%.

ECB President Christine Lagarde on Monday welcomed news of the

peace deal, but other policymakers were more cautious. Germany's

Joachim Nagel said there would be no immediate relief on

inflation because it would take months to restore oil supply to

its pre-war level.

ECB chief economist Philip Lane is scheduled to participate in a

Reuters NEXT event on Tuesday, which could provide further clues

on the outlook for monetary policy.

The market is also watching the Federal Reserve, which kicks off

a two-day policy meeting under new chair Kevin Warsh on

Tuesday.

The U.S. central bank is widely expected to keep the fed

funds rate target range at 3.5%-3.75% when it announces its

decision on Wednesday, while futures imply around an 80% chance

of a quarter-point hike by year-end.