LONDON, July 9 (Reuters) - Euro zone bond yields dipped on

Thursday as oil prices steadied, but they remained near their

highest in seven weeks reflecting fears of a collapse in the

deal between the U.S. and Iran to end their war.

Germany's 10-year bond yield fell 2.5 basis

points (bp) to 3.061% after jumping 10 bps on Wednesday to hit

their highest level since mid-May.

Oil prices inched up on Thursday after rising more than 5% on

Wednesday following U.S. President Donald Trump's comments that

he thought the memorandum of understanding with Iran to end the

war was over. Brent crude last traded 1% lower at $77.23

a barrel.

Energy prices have fallen sharply since the U.S. and Iran

reached a deal in mid-June, which allowed flows to resume

through the key Strait of Hormuz. But commodities markets are

highly sensitive to any signs that trade through the waterway

could again stop.

The U.S. military said on Wednesday it launched fresh

strikes on Iran to keep the strait open to shipping, triggering

Iranian attacks on Kuwait and Bahrain in the latest escalation.

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

to European Central Bank rate expectations, fell 4.2 bps on

Thursday to 2.663% after rising 12 bps the day before. Yields

move inversely to prices.

Traders in money markets were pricing in 37 bps of further

ECB monetary tightening on Thursday, down from 40 bps at one

point on Wednesday but well above the 21 bps expected at the

start of the week.

"The next couple of days would be key to deciding whether we

get further escalation, or this was another show of force," said

Mohit Kumar, chief European economist at Jefferies.

Italy's 10-year bond yield fell 5 bps to 3.858%

after rising 13 bps on Wednesday, when the closely watched

spread between Italian and German yields rose to

its highest since early May at 81 bps.

France's 10-year yield was also down 5 bps. The

spread between French and German yields closed at

82 bps on Wednesday, the highest since October last year, as

investors sold the bonds of more indebted countries.