(Adds new comment, milestones on yields, US consumer sentiment

report)

* US retail sales unexpectedly fall; market impact wanes

* Hormuz Strait traffic grinds to a halt; oil rises

* US rate futures pare September rate hike odds

* US yield curve steepens, led by longer yields

By Gertrude Chavez-Dreyfuss

NEW YORK, Aug 14 (Reuters) - U.S. Treasuries fell on Friday

after an initial rally driven by weaker-than-expected retail

sales data faded, while persistent Middle East tensions kept

investors on edge with crude prices turning higher.

In afternoon trading, U.S. 2-year yields, which are sensitive to

the outlook for interest rate moves, rose 3.1 basis points (bps)

to 4.171%. On the week, however, they were down 3.1

bps, sliding for a third straight week.

Following the retail sales number earlier, the 2-year yield

dropped to its lowest since late May.

The benchmark 10-year yield climbed 4.9 bps to 4.690%

, while U.S. 30-year yields advanced 4.7 bps to

5.258%, the largest one-day rise since late July.

U.S. 30-year yields have risen in three of the last four weeks.

Rising yields mean Treasury debt prices are down.

Following the retail sales figures, Treasury yields, which

move inversely to prices, fell across the curve, before rising

again, suggesting investors remain more concerned about

inflation stemming from the Middle East conflict than the recent

run of weaker-than-expected economic figures.

"Looking at the 10-year, I guess it's basically done a round

trip since retail sales," said Zachary Griffiths, head of macro

and investment grade strategy at CreditSights. "I guess there's

still a lot of uncertainty with respect to the Iran war and what

that means for oil prices."

U.S. retail sales fell 0.6% last month after an unrevised 0.2%

gain in June, the first decline in nine months as the boost from

big tax refunds eased.

The unexpected decline in retail sales was also payback

after Amazon pulled forward its Prime Day event to June from

July, analysts said, as other retailers also offered competing

promotions. Declining gasoline prices also weighed on receipts

at service stations.

"Most of the weakness seems to be a timing issue, with

Amazon's Summer Prime Day moving forward a few weeks into June

this year," wrote Tom Simons, chief U.S. economist at Jefferies

in New York, in a research note.

The Amazon factor caused nonstore retailer sales to drop 2.2%,

he added. "Looking past this drag, the numbers aren't quite as

bad as they seem."

RATE HIKE CHANCES EASE

Following the retail sales report, U.S. rate futures priced in

just a 29% chance of a rate hike at next month's policy meeting,

down from 34% late on Thursday, according to the CME's FedWatch.

U.S. consumer sentiment also soured in early August on worries

about the rising cost of living.

The University of Michigan's Consumer Sentiment Index dropped

to 51.0 this month from 55.2 in July, ending two straight months

of improvement. Economists polled by Reuters had forecast the

index would be at 54.5.

Investors remain worried about the Strait of Hormuz. Transit

through the key waterway appeared to grind to a near standstill

on Friday after two more ships were attacked and the United

States said it could maintain a naval blockade of Iran

indefinitely.

Benchmark Brent futures and U.S. West Texas

Intermediate crude futures were both up at about $88 and

$82 a barrel respectively.

The yield curve steepened following the retail sales data, with

the gap between 2-year and 10-year yields rising to 52.9 bps

, the widest spread since May. It was last at 51.5

bps, compared with 49.8 bps late Thursday.

The curve's shift is known as a bear steepener, where

long-term yields rise faster than shorter-dated ones, suggesting

a pickup in inflation expectations.

Ian Lyngen, managing director and head of U.S. rates strategy at

BMO, said the bond market is likely facing a period of

consolidation in the coming week now that major indicators have

been reported.