* Markets lower chances of Fed September rate hike

* Brent crude falls about 2%

* Markets, economists still expect ECB to hike in September

(Updates for late European morning trading)

By Samuel Indyk

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

marginally lower on Thursday as oil prices retreated and 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 down just under 1 basis point at 3.151%, 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 released later on Thursday will

provide another readout on the U.S. inflation picture.

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 2% to $87.30 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%.