* German bond yields rise as US strikes dampen peace

hopes

* ECB policymakers, including Schnabel, signal likely

June hike

* Money markets price in 90% chance of June ECB hike, at

least two hikes by year-end

(Updates for late European morning trading, adds analyst quote

in paragraphs 4-6)

By Samuel Indyk

LONDON, May 26 (Reuters) - Germany's 10-year bond yield

rose on Tuesday on concerns a Middle East peace deal may still

be some way off after the U.S. launched new strikes on Iran,

although it remained near a roughly seven-week low hit the

previous day.

U.S. and Iranian negotiators remain in talks to end the

three-month war that has severely disrupted Middle Eastern oil

and gas supplies and pushed global inflation higher.

Expectations of a breakthrough and a reopening of the Strait of

Hormuz had supported bonds in recent days.

But optimism was tempered overnight after the U.S. said it

had carried out what it described as defensive strikes in

southern Iran, suggesting any peace deal is not imminent.

The escalation in the Middle East was pushing up bond yields

across the bloc on Tuesday, according to Anders Svendsen, chief

analyst at Nordea.

"Directionally, bonds are still trading on headlines from

the Middle East," said Svendsen.

"We think at the point where there is a reopening (of the

Strait of Hormuz) that there will be relief in risky assets and

yields will come down, but then the focus will be on

second-round impacts and those are going to be significant."

Germany's 10-year yield was up 2.5 basis points

at 2.973%, after falling almost 9 bps on Monday to 2.93%, its

lowest since April 8.

The 30-year yield was up 1.5 bps at 3.516% after

touching 3.484% on Monday, its lowest since April 9.

ECB TO HIKE?

The European Central Bank has kept interest rates on hold

for the past year but looks increasingly likely to raise them

next month as sharply higher energy costs have pushed inflation

well above its 2% target.

ECB policymaker Isabel Schnabel told Reuters that the

central bank should raise rates in June even if a peace deal is

struck, given the size and persistence of the energy

shock. Other policymakers have also recently made the case for

tighter monetary policy.

Money-market traders are pricing in about a 90% chance of a

hike at the ECB's June meeting, while 57 bps of tightening is

priced by year-end, implying at least two quarter-point hikes.

"I struggle to see how we get out of this without some form

of secondary impact, without higher inflation, and therefore

also higher ECB rates," said Nordea's Svendsen, adding that

analysts have factored in four rate hikes from the ECB this

year.

"Two hikes will not do anything to dampen the second-round

impact so there's a fair chance they will end up doing more than

that."

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

changes in rate policy, was up 3 bps to 2.57%. It fell 10 bps on

Monday to 2.523%, its lowest since May 7.