(Updates prices)

By Lucy Raitano

LONDON, May 8 (Reuters) - Short-dated euro zone

government bond yields edged up on Friday as renewed clashes

between the U.S. and Iran kept oil prices around $100 a barrel,

although moves were muted compared to volatile sessions earlier

this week.

Two-year German bond yields rose 1.8 basis points to 2.59%

, a second day of gains after their biggest daily fall

in a month on Wednesday. Benchmark 10-year German Bund yields

were unchanged at 3%.

Brent oil prices - a key driver of broader financial

markets since the war started in late February - were last up

0.4% at $110.48 a barrel, having risen as much as 3%.

The monthly U.S. employment report showed the world's largest

economy created far more jobs than expected in both April and

March, while wage growth was relatively benign, which helped

soothe some concern that the turmoil from the war and high

energy prices were hurting underlying activity.

UK gilts were in focus after British Prime Minister Keir

Starmer's Labour Party suffered heavy early losses in local

elections.

Gilts were outperforming major peers, with the 10-year

yield down 5 bps at 4.893%, after Starmer vowed to

stay in office to "deliver change".

"The bad result for Labour, I think, is priced in," said

Kallum Pickering, chief economist and deputy head of research at

Peel Hunt.

Longer-dated 30-year UK gilt yields fell 7 bps to 5.57%

.

Bond investors remain focused on inflation risk amid higher

energy prices, though major central banks including the Federal

Reserve, European Central Bank and Bank of England opted to keep

interest rates on hold last week.

"I think markets are priced too much towards interest rate

hikes and not enough towards central banks trying to hold

through this and then cut in Q4," said Peel Hunt's Pickering.

"There's much too much muscle memory from 2022 when the

Russian invasion of Ukraine caused the gas price to go up,"

Pickering said, adding that the main risk was to output and

employment.

ECB Executive Board member Isabel Schnabel - one of the bank's

top policymakers - warned on Thursday of the rising risk of

higher inflation in the wake of the Iran war and of the "quiet

erosion" of central bank independence at a difficult moment of

rising global debt.

Money markets show traders are attaching roughly a 57%

chance of no change in policy at the ECB's next meeting in June,

reversing from last week when the majority were betting on a

hike.

On Friday, German exports rose unexpectedly in March, but

industrial output fell despite a forecast rise, official data

showed.

Italian 10-year bond yields were 2 bps lower at 3.729%

.

(Reporting by Lucy Raitano; Additional reporting by Amanda

Cooper; Editing by Toby Chopra, Mark Potter and Emelia

Sithole-Matarise)