(Updates throughout)

By Sophie Kiderlin

LONDON, July 24 (Reuters) - Euro zone bond yields fell on

Friday, having hit multi-year highs a day earlier, as oil prices

eased back below the $100 mark and markets weighed the inflation

and interest rate outlook.

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

zone, was last down 2.7 basis points (bps) to 3.1845%. It hit a

15-year high in the previous session.

Euro zone bonds have been under pressure - especially given the

European economy's vulnerability to imported energy - throughout

the week, with oil prices rising above $100 per barrel for the

first time since May. On Friday, Brent crude futures were last

almost 3.2% lower at $97.53 per barrel, though they were still

set for a near 11% weekly rise.

"Oil dynamics are set to remain in the driving seat," for bond

markets, Commerzbank strategists said in a note.

Energy prices have been pushed higher by fresh hostilities in

the Middle East, as well as concerns about a second shipping

chokepoint emerging. Spiking energy costs prompted fresh

inflation worries and led traders to bet on additional policy

tightening from the world's central banks.

Elsewhere, the U.S. on Friday imposed new tariffs on goods from

60 trading partners, which further added to inflation jitters.

ECB RATE OUTLOOK

The European Central Bank left interest rates unchanged on

Thursday, as expected, but kept the option for a September

increase on the table. Markets were last pricing in a strong

chance of a September rate hike from the ECB, with the

possibility of another increase later in the year.

Felix Schmidt, senior economist at Berenberg, said the ECB would

likely react in September if energy prices remain around current

levels or spike further. But, he noted that the situation in the

Middle East could change quickly.

"If you see a de-escalation, another ceasefire - we saw it after

the first ceasefire, oil prices can come back very quickly and

inflation can come down very quickly, so there's also still the

chance that there will be no hike in September," Schmidt said.

Several ECB policymakers on Friday noted that inflation risks

are high and that the central bank may need to raise rates once

more, but they stopped short of calling for an outright hike at

the bank's September meeting.

The yield on Germany's two-year bond, which is more sensitive to

interest rate expectations, was last around 4.8 bps lower at

2.8421%, having touched its highest point since July 2024 in the

previous session.

Meanwhile, a survey on Friday showed that euro zone business

activity returned to growth in July for the first time in four

months, driven by a rebound in new orders, while the rate of

overall input cost inflation eased to its lowest since

February.

"Were it not for the resurgence of the conflict in the Middle

East, the picture would have looked encouraging," ING economist

Bert Colijn said.

"But as European Central Bank President Christine Lagarde said

yesterday at the press conference, we are back to where we were

in early June, with downside economic risks and upside

inflationary risks resurfacing."