LONDON, June 2 (Reuters) - Euro zone government bond

yields fell on Tuesday, partially reversing Monday's jump, as

hopes of a U.S.-Iran deal resurfaced despite lingering

uncertainty.

Optimism had faded heading into the week, but comments from U.S.

President Donald Trump late on Monday revived hopes after he

said talks on ending the conflict with Iran were continuing.

On Tuesday, a source close to Iran's negotiating team told Mehr

News that Tehran has yet to respond to a proposed final

agreement with the U.S., and that internal discussions on the

text are ongoing.

Oil prices slipped, with Brent crude futures last around

0.9% lower to $94.13 a barrel.

The yield on the German 10-year government bond, the euro

zone benchmark, fell 5.7 basis points to 2.9563%, after rising 8

bps on Monday.

Italy's 10-year yield dropped 8.1 bps to 3.6794%, also

paring the previous session's sharp rise.

Markets were also awaiting May's flash euro zone inflation

data, due later on Tuesday, for fresh clues on the economic

impact of the Iran war. Economists polled by Reuters expect

inflation of 3.2%, after it jumped to 3% in April on higher oil

prices, well above the ECB's 2% target.

The data comes ahead of the European Central Bank's June 11

meeting. Money markets are pricing in about a 95% chance of a

25-bp rate hike then, with a total of two such hikes seen this

year and a chance of a third.

Germany's two-year yield, sensitive to rate expectations,

was last down 5 bps at 2.5791%, after jumping more than 9 bps on

Monday.

Italy's two-year yield fell 7.5 bps to 2.7455%, also

reversing part of Monday's rise.