* Euro zone bonds fall; set for second weekly drop

* Traders bet on ECB rate hikes

* Tehran vows to keep Strait of Hormuz shut

(Updates prices, adds FT report)

By Niket Nishant

LONDON, March 13 (Reuters) - Euro zone government bonds

were on track on Friday for their second consecutive weekly

decline, as lingering concerns over the inflationary impact of

the Middle East war pushed yields higher.

The surge in oil prices since the outbreak of the

U.S.-Israeli war with Iran could exacerbate inflation worries

and prompt the European Central Bank to raise interest rates,

according to analysts.

Oil prices climbed again on Friday in choppy trading as

investors reacted to headlines about oil flows through the key

Strait of Hormuz.

France and Italy have opened talks with Iran seeking to

negotiate a deal to guarantee safe passage for their ships

through the Strait, the Financial Times reported on Friday,

although Italy denied the report.

Money markets are pricing in a more than 60% chance of an

ECB rate hike by June, according to LSEG data. Before the war

started they saw a small chance of a cut this year.

"Policymakers were clinging on to any economic figures to

give them an excuse to cut rates, but that conversation has now

shifted," said Roy Kashi, CEO of investment advisory firm

Falconedge.

Germany's 10-year government bond yield rose 3

basis points (bps) on the day to 2.9723% as prices fell. It was

on course for a weekly jump of 11 bps, following a 21 bps rise

last week.

Italy's 10-year government bond yield climbed 5

bps to 3.7876%. It was up 15 bps for the week after jumping 36

bps last week.

The safe-haven appeal of government bonds has been called

into question during the current market volatility as investors

have largely looked past them due to inflation worries.

The conflict also shows little sign of easing, dashing

earlier hopes of a quick resolution. Iran's Supreme Leader

Mojtaba Khamenei said Tehran will keep the Strait of Hormuz shut

as leverage against the U.S. and Israel, defying threats from

President Donald Trump.

Brent crude futures headed for a weekly jump of

nearly 10% despite efforts to ease the energy supply shock. It

was up 1% to $101.20 a barrel on Friday.

Traders on Polymarket are pricing in around a 20% chance of

a ceasefire by the end of the month, compared with 45% earlier

this week.