* German 10-year Bund yield rises 1 bp to 3.11%, 2-year

yield gains 2 bps

* 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

(Updates prices throughout, adds quote in paragraph 5, details

of latest sales in paragraphs 6, 10 and 12)

By Amanda Cooper

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

edged up on Thursday, shrugging off a drop in oil on the back 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 held below $80 a barrel following news of

a proposed deal between Iran and Oman to help end the war that

would give Tehran control over marine traffic entering the Gulf

through the strait. Lower energy prices limit the risk of a

damaging spike in inflation, which hurts bonds.

German 10-year yields traded at 3.11% on

Thursday, up just 1 basis point from Wednesday's close, while

2-year yields rose 2 bps to 2.73%.

That said, crude futures are some 10% 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 2.916% on Thursday, 2-year OATs are yielding 19.3 bps

more than a month ago, compared with top-performing 2-year U.S.

Treasuries, with a rise of 7.5 bps, and a whisker ahead of the

19-bp rise in German Schatz yields in that time.

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

month ago, compared with 10 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 2 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 bp on

the day at 3.56%.

($1 = 0.8666 euros)