(Updates prices)

* 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

By Samuel Indyk

LONDON, May 26 (Reuters) - German 10-year bond yields

edged above seven-week lows on Tuesday, after the U.S. launched

new strikes on Iran, which cast doubt over the chances of an

imminent Middle East peace deal.

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 bond prices in recent days.

But that 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," Svendsen said.

"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 3 basis points at

2.98%, after falling almost 9 bps on Monday to 2.93%, its lowest

since April 8.

The 30-year yield was up 1.9 bps at 3.52% 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.

Separately, Dutch central bank chief Olaf Sleijpen said the

persistence of any energy price shocks will be key in guiding

the ECB's next policy decision.

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 the most sensitive

to changes in rate policy, was up 5.4 bps to 2.592%. It fell 10

bps on Monday to 2.523%, its lowest since May 7. It is still

around 58 bps higher than where it was before the war broke out.