* Friday's rally partly reverses as traders rebuild shorts

* Curve bear-steepens, with 2s10s spread widening to 46.2

bps

* Oil's rise on Iran tensions adds pressure to Treasuries

By Gertrude Chavez-Dreyfuss

NEW YORK, Aug 10 (Reuters) - U.S. Treasuries retreated on

Monday, in line with weakness across European bond markets, as

investors braced for key inflation readings this week that could

point to persistent price pressures, while keeping a close eye

on continued geopolitical Middle East tension as oil prices

rose.

The move reversed part of Friday's rally, which followed

weaker-than-expected U.S. nonfarm payrolls data, as traders

re-established short positions and pared long exposure.

In late morning trading, the benchmark 10-year yield rose

3.6 basis points (bps) to 4.694%. U.S. 30-year bond

yields were up 3.0 bps at 5.240%. Rising yields mean

bond prices are lower.

On the shorter end of the curve, the yield on 2-year notes

, which are sensitive to market expectations for

Federal Reserve interest rate moves, advanced 3.3 bps to 4.237%.

"Markets are definitely waiting for CPI and PPI," said Tom

di Galoma, managing director for global rates trading at

Mischler Financial, noting that the inflation numbers were far

from disinflationary, and could come in above market forecasts.

The consumer price index (CPI) is forecast to rise 0.1% in

July from a 0.4% fall in June, while the year-over-year figure

is expected at 3.4% from 3.5% the previous month, according to a

Reuters poll. The core CPI forecast was for a 0.1% rise while

the year-on-year number was seen at 2.5%.

The headline U.S. producer price index is seen rising 0.2%

in July after a 0.3% decline. Year-over-year, PPI is expected to

rise 4.9% after advancing 5.5% in June.

US RATE FUTURES; IRAN

"In the event that core-CPI comes in line with...consensus,

the FOMC (Federal Open Market Committee) would be compelled to

keep rates unchanged if it was only the July data driving the

decision," wrote Ian Lyngen, head of U.S. rates strategy, at BMO

in a research note.

U.S. rate futures priced in a 48% chance the Federal Reservs

will hike rates next month, down from 67% a week ago, according

to the CME's FedWatch.

The Iran war was also a factor driving the selloff,

Mischler's di Galoma said.

Iran has tied the reopening of the Hormuz Strait to the United

States meeting certain conditions. That pushed U.S. crude

futures up 3.4% at $80.84 per barrel.

Aside from the war, this week's Treasury supply also weighed

on prices, with the auction of $58 billion in 3-year notes on

Tuesday, $42 billion in 10-year debt on Wednesday and $25

billion in 30-year bonds on Thursday.

The U.S. Treasury also sold $92 billion in 13-week bills and

$79 billion in 26-week bills on Monday.

The auctions create a classic 'concession-building dynamic:

dealers and real money push yields higher to attract

end-investor demand.

In other parts of the bond market, the yield curve steepened

on Monday ahead of the CPI and PPI numbers, with the gap between

2-year and 10-year yields widening to 46.2 bps,

compared with 44.8 bps late on Friday.

The curve showed a bear steepening scenario, in which long

term interest rates are rising faster than shorter-dated ones,

suggesting a pick up in inflation expectations.