LONDON, July 15 (Reuters) - Euro zone bond yields edged

higher on Wednesday, a day after swinging dramatically over

renewed hostilities in the Middle East and the release of U.S.

inflation data.

Germany's 2-year bond yield was last up 1 basis

point at 2.731%. Yields move inversely to prices.

The yield, which is sensitive to central bank rate

expectations, rose as much as 8 bps on Tuesday to a two-year

high as oil prices jumped on the U.S.-Iran conflict, before

falling sharply after U.S. inflation data came in weaker than

expected and ending roughly flat on the day.

The United States and Iran continued to trade strikes on

Tuesday and Wednesday after Iran said it had closed the Strait

of Hormuz and the U.S. reimposed a naval blockade of Iranian

ports.

Iran's Islamic Revolutionary Guard Corps has threatened to

close other export corridors, Iranian media reported, in what

analysts said was a possible sign it could use its Houthi allies

in Yemen to shut the Bab el-Mandeb gateway to the Red Sea,

putting two of the world's most vital energy arteries at risk.

Oil prices were also quieter on Wednesday, with Brent crude

down 1% at $84.11 a barrel.

Germany's 10-year bond yield, the benchmark for

the euro zone, rose 2 bps to 3.091%.

A jump in oil prices over the last week has seen traders

sharply raise their bets on ECB rate hikes this year, but they

wound them back in somewhat after the U.S. CPI inflation data.

Money markets were last pricing in 43 bps of further ECB

tightening this year, up from 30 bps a week ago but down from a

peak of 48 bps on Tuesday.

Data on Tuesday showed headline U.S. inflation slowed more

than expected to 3.5% year-on-year in June, down from 4.2% in

May, although the fall was largely due to a drop in energy

prices which is now under threat.

Analysts at ING said ECB rate pricing was likely to be

mainly driven by oil and gas prices.

"Markets' European Central Bank pricing can continue to

diverge from the Fed's," the analysts, Michiel Tukker and

Benjamin Schroeder, wrote on Wednesday.

"The momentum in U.S. inflation should be downwards, whereas

for Europe the peak might not be in sight yet, especially if

energy prices continue to drift higher again."