* Markets expect the ECB to keep depo rate unchanged on

Thursday

* Investors price in 45 basis points of tightening by

year-end

* Oil prices above $90/barrel

(Updates for European afternoon trading)

By Samuel Indyk

LONDON, July 21 (Reuters) - Euro zone government bond yields

were slightly higher on Tuesday as Brent crude futures rose back

above $90 per barrel, threatening the inflation outlook and

strengthening the case for tighter policy from the European

Central Bank.

Investors were also watching Britain's gilt market after new

Prime Minister Andy Burnham picked former defence minister John

Healey - who was a junior minister in the Treasury from 2002 to

2007 - as his finance minister.

Germany's 10-year bond yield was up over 2 basis

points (bps) at 3.175%, its highest level in over eight weeks.

ALL ABOUT ENERGY

Bond markets have been driven by energy prices in recent

weeks, according to Hauke Siemssen, rates strategist at

Commerzbank.

Energy prices have been rising following military strikes by

both the United States and Iran, with maritime traffic through

the vital Strait of Hormuz chokepoint effectively shut down.

Brent futures rose over 2% on Tuesday but were just below a

five-week high reached on Monday of $91.42 per barrel. Benchmark

Dutch wholesale gas prices rose to their highest

intraday level in four months on the same day, adding to worries

about inflation before the ECB's policy announcement on

Thursday.

Markets expect the central bank to hold its deposit rate

steady at 2.25%, following a rate rise in June.

Further ahead, investors were pricing in about 45 basis

points of tightening from the ECB by the end of the year, or the

equivalent of one quarter-point rate hike and an 80% chance of a

second.

"What the market is pricing in terms of ECB hikes is a lot,"

said Commerzbank's Siemssen.

"A hike in September can be justified with the inflation

figures, but then I think the bar will be high for another hike

into restrictive territory as they have to keep an eye on

growth," he added.

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

to changes in ECB policy expectations, was up 1.5 bps at 2.793%

after touching a two-year high of 2.8174% on Monday.

Meanwhile, Britain's gilts slightly outperformed after PM

Burnham's choice of Healey as finance minister.

"The Prime Minister's surprise pick ... might help at the

margin, as he was seen as more market-friendly than most

alternatives," said Rob Wood, chief UK economist at Pantheon

Macro.

Britain's benchmark 10-year gilt yield was flat

at 5.034%. Bond yields move inversely with prices.