(Updates after yields rise further on Iran talks headlines)

* Euro zone bond yields jump as ceasefire hopes fade

* Iranian news agency reports mediators to stop messaging

U.S. side

* Oil prices rise, pushing up bets on ECB rate hikes

By Stefano Rebaudo and Harry Robertson

June 1 (Reuters) - Euro area government bond yields rose

sharply on Monday as hopes of an imminent U.S.-Iran deal faded,

with borrowing costs tracking moves in oil prices - which rose

more than 5%.

The U.S. said it struck Iranian military sites at the weekend

and Iran's Revolutionary Guards said on Monday they had targeted

a U.S. base in response, but President Donald Trump reiterated

that Iran really wanted to make a deal.

Yields rose further after the Iranian Tasnim news agency

reported a halt in messaging with Washington through mediators

in response to Israel's operations in Lebanon.

Israeli Prime Minister Benjamin Netanyahu ordered attacks on

Beirut's Hezbollah-controlled southern suburbs on Monday, with

both the Iran-backed group and Israel accusing each other of

ceasefire violations.

Germany's 2-year yields, which are sensitive to

expectations for policy rates, rose 11 basis points (bps) to

2.635%. They reached 2.771% in late March, the highest since

July 2024.

Money markets were last pricing in around 65 bps of ECB

monetary tightening this year, up from around 55 bps on Friday

.

Traders also saw a rate hike this month as almost certain

. The main ECB rate is currently 2%.

"A jaded cynicism has come over investors, and in the

absence of a definite statement from Iran there is a tendency to

downplay comments from the U.S. administration," Paul Donovan,

chief economist at UBS Global Wealth Management, said.

"Ultimately, hopes prevail that a possible framework

agreement will pave the way for gradually normalising traffic in

the Strait of Hormuz," Rainer Guntermann, economist at

Commerzbank, said.

Germany's 10-year government bond yield, the euro

area's benchmark, jumped 8 bps to 3.014%. It reached 3.13% in

late March, its highest level since June 2011.

Italy's 10-year government bond yields rose 10 bps

to 3.755%.

The moves pushed the yield gap of Italian government bonds

versus bunds up to 73 bps. It was at 63 bps before

the attack on Iran and hit 103.62 in late March, the highest

level since June 2025.

Investors are also monitoring macroeconomic data ahead of

next week's ECB policy meeting.

ECB survey data on Monday showed euro zone consumers kept

steady or lowered their inflation expectations in April in a

sign that expectations of spiralling prices are not becoming

embedded in the economy.

Meanwhile, growth in manufacturing lost momentum in May as

demand for goods stagnated and supply-chain disruptions linked

to the Iran war pushed input costs to their highest in four

years.