(Updates pricing in European afternoon)

* German 10-year Bund yield rises 1 bp to 3.12%

* Jefferies says oil likely settles at $75 to $80 a barrel

* France sells nearly 8 billion euros of 10-year bonds at

higher average yields

By Amanda Cooper

LONDON, Aug 6 (Reuters) - Euro zone government bond yields

edged up on Thursday as markets watched out for signals of a

possible re-opening of the Strait of Hormuz, as energy prices

remain well above pre-war levels and any deal on maritime

traffic may prove fleeting, analysts said.

Oil prices were last just above $81 a barrel as

investors were cautious about the outcome of Iran-Oman talks. A

proposed deal between the two to help end the U.S.-Iran conflict

would give Tehran control over ships entering the Gulf through

the Strait of Hormuz. Lower energy prices limit the risk of a

damaging spike in inflation, which hurts bonds.

German 10-year yields traded at 3.12% on

Thursday, up 1.7 basis points, while 2-year yields

rose 1.6 bps to 2.73%.

Crude futures are around 12% above where they were before

the war broke out in late February, while European physical

crude prices are still anywhere between 18% and 25% above those

levels, which could curtail further rallies in bond prices,

analysts said.

"A deal could see 10-year U.S. Treasuries moving back

towards 4.5% and 10-year Bunds towards 3%, but we do not see a

rally much beyond that. Our base case remains that oil would

likely settle in the $75-$80 range, which is still a good

25%-30% higher than pre-war levels and would need to be factored

into growth and inflation expectations," Jefferies strategist

Mohit Kumar said.

On the supply front, France sold nearly €8 billion ($9.2

billion) in 10-year bonds on Thursday and, although demand held

up well, the cost of borrowing spiked.

Unease over European governments' long-term financing,

combined with volatile domestic politics, has undermined French

bonds recently. OATs have been the poorest

performers among the G7 debt markets in the last month.

At 2.909% on Thursday, 2-year OATs are yielding roughly 20

bps more than a month ago, compared with top-performing 2-year

U.S. Treasuries, with a rise of around 9 bps, and a

whisker ahead of the rise in German Schatz yields in that time.

Benchmark 10-year yields are nearly 18 bps higher than a

month ago, compared with roughly 11 bps for UK gilts, the

best-performing bonds in the last month.

France sold May 2036 paper at an average yield of 3.737% on

Thursday, up from 3.68% at the July auction, as well as November

2036 bonds that achieved an average yield of 3.9%, up from 3.73%

last month.

French 10-year OATs were trading 1.9 bps higher

on the day at 3.91%.

Spain also sold nearly €2 billion in 10-year debt on

Thursday, for an average yield of 3.542%, up from an average of

3.395% at the last such sale in July, as well as €1.85 billion

in 5-year debt for an average 3.005%, up from 2.835% in July.

Yields on the benchmark 10-year Bono were up 1.4 bps

on the day at 3.56%.

($1 = 0.8666 euros)