April 24 (Reuters) - Euro zone short-dated government

bond yields were headed for their biggest weekly rise in over a

month as tensions over the Strait of Hormuz spurred energy

prices higher, stoking inflation fears and European Central Bank

rate hike expectations.

Brent futures rose on Friday due to fears of a renewed

military escalation in the Middle East after Iran released video

of commandos boarding a cargo ship in the Strait of Hormuz,

after the collapse of peace talks with Washington.

U.S. President Donald Trump dismissed the threat posed by what

he described as Iran's "little wise-guy ships" and told

reporters that he believed Tehran wanted to make a deal but that

its leadership was in turmoil.

Germany's 2-year yields DE2YT=RR, more sensitive to expectations

for monetary policy rates, rose 4.5 basis points (bps) on Friday

to 2.6%. They reached 2.771% in late March, the highest since

July 2024, and were set for a weekly rise of 17 bps.

Investors shrugged off data showing German business morale fell

more than expected in April, as the U.S.-Israeli war with Iran

made companies more pessimistic and threatened the long-awaited

recovery of Europe's biggest economy.

"The war in the Middle East and soaring energy prices have

again exposed the fact that Germany is one of Europe's largest

net importers of energy," said Carsten Brzeski, global head of

macro at ING.

"Even if sentiment is suffering enormous setbacks right now

and fears of another year of stagnation have returned, it should

be clear that the planned investments in defence and

infrastructure are still on track and should support the economy

this year and beyond," he added.

The ECB is widely expected to place a stronger emphasis on

bringing inflation under control, even if doing so comes at the

expense of short-term economic growth.

While markets believe the central bank is inclined toward a more

hawkish stance to address the energy shock, they expect

policymakers to remain on hold at next week's meeting.

Germany's 10-year government bond yield DE10YT=RR, the euro

area's benchmark, was up 3 bps at 3.04%. It reached 3.13% in

late March, its highest level since June 2011.

Money markets priced in an ECB deposit facility rate at 2.64% by

year-end EURESTECBM6X7=ICAP - implying two rate hikes and about

a 55% chance of a third move.

Italy's 10-year government bond yields IT10YT=RR rose 6.5 bps to

3.83%. The yield gap of Italian government bonds versus Bunds

DE10IT10=RR was at 78 bps, the highest level since April 8, the

day after the U.S.-Iran ceasefire announcement.