LONDON, April 7 (Reuters) - Euro zone bond yields rose

on Tuesday as uncertainty over the Iran war persisted and a

U.S.-imposed deadline for a deal on the conflict loomed large.

Iran and Israel traded attacks as Tehran refused to reopen the

Strait of Hormuz and accept a ceasefire deal ahead of a Tuesday

night deadline from U.S. President Donald Trump to agree to his

demands or get "taken out".

Still, markets held on to some hopes for de-escalation as

they mulled the potential impact of the conflict on inflation,

economic growth and central bank interest rates.

"Markets remain torn between escalation fears and ceasefire

hopes. While some relief may be warranted as the war in Iran did

not escalate further over the long Easter weekend, Trump's

extended Tuesday night deadline is still looming large," Hauke

Siemssen, rates strategist at Commerzbank, said.

With the latest Iran developments firmly in focus and oil

prices above the $110 per barrel mark, markets remained

"headline driven, and small announcements can cause large swings

in yields and spreads," he said.

The yield on the benchmark German 10-year Bund

was last up by 1.8 basis points to 3.0131%.

Government bonds worldwide came under pressure soon after

the war started on February 28, with yields jumping higher as

inflation expectations surged on spiking energy prices. Euro

zone bond yields broadly recorded their first weekly decline

since the start of the conflict last week.

Markets were last pricing in at least two interest rate

hikes, with a strong chance of a third, from the European

Central Bank by the end of the year, broadly in line with

expectations prior to the long weekend. Before the Iran war

broke out, markets had seen a small chance of a rate cut from

the ECB this year.

German 2-year yields, which are more sensitive to

rate expectations, were last up 3.1 bps to 2.6546%.

The yield on Italy's 10-year government bond was

last up 2.7 bps to 3.8964%, with the gap between the German and

Italian 10-year bond yields last standing at

around 87 bps.