* Import prices rose 0.3% last month

* 10-year yield set for first weekly decline after two

straight advances

* CME FedWatch shows markets pricing a 10.2% chance of a

July hike

(Updates to afternoon trading)

By Chuck Mikolajczak

NEW YORK, July 17 (Reuters) - Longer-dated U.S. Treasury

yields dipped on Friday after the latest round of economic data

and were set for a weekly decline as markets have largely priced

out any chance of a rate hike from the Federal Reserve at its

policy meeting later this month.

The Labor Department said import prices increased 0.3% last

month, above the estimate of economists polled by Reuters that

called for a 0.7% decrease, after a downwardly revised 1.7%

advance in May.

The data showed declines in the costs of food and energy

products were more than offset by higher prices for capital and

consumer goods.

Expectations for a rate hike of at least 25 basis points

from the Fed tumbled earlier this week after readings on

consumer and producer prices were cooler than expected.

Money markets are now pricing in only a 14.4% chance for a hike

in July, according to CME FedWatch, down from slightly more than

40% on Monday. However, expectations for a hike at the central

bank's September meeting stand at 57.1%.

But recent comments from multiple Fed officials, including

Chairman Kevin Warsh, have flagged concerns about inflation

pressures while noting the labor market remains stable.

"The market is still not sure what to do with all this

information - you have the Fed sounding extremely hawkish, the

data coming in not as hawkish, but it's also one reading," said

Gennadiy Goldberg, head of U.S. rates strategy at TD Securities

in New York.

Geopolitical worries are also re-escalating ahead of the

weekend, he added.

"So it's unclear as to whether a lot of this transitory

noise in inflation will remain transitory, or whether the Fed

should be starting to look at it more closely as a potential

source of inflationary pressure."

BENCHMARK YIELD SET FOR WEEKLY DECLINE

The yield on the benchmark U.S. 10-year Treasury note

fell 2.8 basis points to 4.541%. The yield was

down nearly three basis points on the week and set for its first

weekly drop after climbing for two straight weeks.

Yields had been retreating since mid-May as tensions between the

U.S. and Iran appeared to be waning, pushing oil prices lower.

However, hostilities have intensified in recent weeks, including

attacks on infrastructure, causing a reversal in crude prices to

one-month highs.

U.S. crude jumped 4.74% to $82.69 a barrel and Brent

climbed to $88.14 per barrel, up 4.64% on the day.

The yield on the 30-year bond shed 3.3 basis

points to 5.064% and was slightly lower on the week, which would

mark its first weekly decline in three.

A risk-off move that was weighing on stocks may have been

providing a bid to bonds, said Mona Mahajan, head of investment

strategy and asset allocation at Edward Jones. "We're seeing a

similar move in the bond market with, despite the higher oil

prices, bond yields are moving lower today, so maybe bonds

acting as a bit of that flight to safety trade."

Late Thursday, Federal Reserve Vice Chair Philip Jefferson

suggested he would be open to raising interest rates if there is

no near-term improvement in inflation, though for now he

believes it will be enough to hold short-term borrowing costs

steady.

His comments came after Dallas Federal Reserve President Lorie

Logan called for "modestly higher" interest rates earlier in the

day.

A closely watched part of the U.S. Treasury yield curve

measuring the gap between yields on two- and 10-year Treasury

notes, seen as an indicator of economic

expectations, was at a positive 36.9 basis points.

The two-year U.S. Treasury yield, which

typically moves in step with interest rate expectations for the

Fed, fell 2.2 basis points to 4.134% and was down four basis

points on the week.

The breakeven rate on five-year U.S. Treasury

Inflation-Protected Securities (TIPS) was last at

2.271% after closing at 2.248% on Thursday.

The 10-year TIPS breakeven rate was last at

2.245%, indicating the market sees inflation averaging about

2.2% a year for the next decade.