LONDON, May 22 (Reuters) - Euro zone bond yields fell on

Friday as investors reacted to signs of progress in Iran peace

talks, pulling government borrowing costs away from the

multi-year highs reached earlier in the week.

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

the bloc, fell 4 basis points (bps) to 3.062%, while Italian and

French yields fell slightly further .

Yields move inversely to prices.

The German 10-year yield hit a 15-year high of 3.2% on

Tuesday as investors braced for interest rate hikes after the

disruption from the Iran war sent energy prices surging.

Yet Brent crude oil prices fell on Thursday and last

traded at around $104 a barrel, compared to $113 on Monday, as

both Iran and the U.S. reported some progress on peace talks.

U.S. Secretary of State Marco Rubio said there had been

"some good signs" in talks. A senior Iranian source told Reuters

on Thursday that no deal has been reached but that gaps have

been narrowed.

"Geopolitical headlines continue to drive market

volatility," said Benjamin Schroeder, senior rates strategist at

ING.

"Even if signals remain conflicting at times, there is a

suggestion of progress - or at least a narrowing of the gap

between the warring parties' positions."

Germany's 2-year bond yield, which is sensitive

to European Central Bank interest rate expectations, fell 4 bps

to 2.642%.

Traders in money markets on Friday priced in around 65 bps

of rate hikes from the ECB this year, implying two increases and

a 60% chance of a third. That was down from more than 70 bps

earlier in the week.