* Markets price a 65% chance of a second ECB hike this year

* Two-year German Schatz yields rose 10 basis points this

week to 2.752%

* Two-year Italian bond yields rose 13 basis points this

week to 2.97%

By Amanda Cooper

LONDON, July 17 (Reuters) - Euro zone government bond yields

dipped on Friday, but headed for a weekly rise, as the rebound

in energy prices has prompted investors to assume the European

Central Bank may need to deliver more than one more rate hike

this year.

The oil price, which had fallen to its lowest since late

February last week, has risen 11% this week, briefly hitting

one-month highs above $85 a barrel, as the United States

and Iran have escalated attacks on one another in the Gulf,

effectively closing the Strait of Hormuz.

A flurry of cooler U.S. inflation readings has helped U.S.

Treasuries to outperform the rest of the global bond market this

week. Two-year Treasury yields have fallen by the

most in a month, with a drop of 9 basis points, to 4.12% on

Friday.

Given the European economy's greater vulnerability to

imported energy inflation, euro zone bonds have come under

pressure, which has sent yields higher across the board, as

investors now see the ECB raising rates at least once more in

September and attach a 65% chance of a second hike before the

end of the year, from just one hike last week.

Economists believe two more hikes on top of June's are

unlikely and some think a number of the big central banks,

including the Federal Reserve and the Bank of England will not

resort to more increases this year at all.

"As oil prices remain elevated, we could get more hawkish

comments from the central banks. Our view still remains that we

should not see any hike from the Fed, BoE or the ECB this year,"

Jefferies strategist Mohit Kumar said.

"Our pecking order of confidence is the BoE, Fed and the

ECB. The lower confidence in ECB reflects the difference in

mandate. While the Fed and BoE respond to both growth and

inflation, ECB has a singular inflation mandate."

Two-year Schatz yields have risen 10 basis points

this week and on Friday, were trading at 2.752%, up 1 bp on the

day. This maturity is the most sensitive to any changes in

expectation for rates or inflation. The premium the U.S.

government must pay to borrow for two years over that of the

German government has fallen to 137.7 bps, its smallest in two

months.

Two-year Italian bonds have performed the worst

this week, which has sent yields up 13 bps to 2.97%, given Italy

relies more heavily on imported fuels than many of its

neighbours.

Benchmark 10-year German Bunds have fared

similarly poorly. The yield has risen around 9 bps this week,

almost matching the weekly increase in 10-year French bond

yields, but behind the 14-bp increase in Italian BT

yields.