* Markets lower chances of Fed September rate hike

* Brent crude falls about 2%

* Markets, economists still expect ECB to hike in September

(Updates prices, recasts top five paragraphs to reflect soft

PPI data)

By Samuel Indyk

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

Thursday as oil prices retreated and the latest round of U.S.

inflation data further 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 2.6 basis point at 3.13% after data showed

the U.S. producer price index was unchanged in July. It followed

Wednesday's benign U.S. consumer price inflation data.

The soft data led traders to further pare back expectations

of a Federal Reserve rate hike in September. Fed funds futures

now show a 31% probability of a September hike, down from 40% on

Wednesday and 55% a week earlier.

U.S. price data is closely watched, given the size of the

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

and global markets.

Noel Dixon, senior macro strategist at State Street, said

the components of Thursday's report that feed into the personal

consumption expenditures data due later this month suggest that

the report "should be pretty good."

"My takeaway from that number and yesterday's number is that

it helps to make the case for the Fed staying on hold in

September," Dixon said.

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 in May.

On Thursday, Brent was down about 2% to $87.20 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 ECB meeting.

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

changes in interest rate expectations, was down about 1 basis

point at 2.759%.