LONDON, April 9 (Reuters) - Euro zone government bond

yields rose on Thursday, reversing some of the previous

session's sharp fall, with traders weighing whether the

U.S.-Iran ceasefire would hold.

Tehran signalled there would be no deal while Israel continued

to strike Lebanon, while U.S. President Donald Trump vowed to

retain military assets in the Middle East until a peace deal

with Iran is reached and warned of a major escalation in

fighting if it failed to comply.

There was also no sign that Iran had lifted its blockade of

the Strait of Hormuz, pushing oil prices higher again on

Thursday.

"When you look at bond prices it's still very much oil

driven," said Michiel Tukker, senior UK & euro zone rates

strategist at ING, adding that markets were struggling to price

the complexities of the situation, instead sticking to the

"where's oil?" playbook.

Yields on the benchmark German 10-year government bond were

up 4.3 basis points at 2.9866%, having fallen around

14 bps on Wednesday.

Italy's 10-year government bond yield was 5.8

bps higher at 3.7755%.

INFLATION AND GROWTH CONCERNS

Government bonds have been under pressure throughout the

Iran war as spiking energy prices stoke inflation concerns and

shift central bank interest rate expectations. Yields have been

sensitive to developments in the conflict, and tumbled Wednesday

following news of the truce.

Traders also scaled back bets on future European Central

Bank rate hikes, but money markets are still pricing in two

policy increases from the central bank this year, with a small

chance of a third. During the conflict, markets have at times

priced in three ECB rate hikes this year.

The probability of a rate hike at the ECB's next meeting in

April was last at around 38%.

Germany's 2-year bond yields, which are more

sensitive to interest rate expectations, were 5.1 bps higher at

2.5441%. They fell more than 23 bps on Wednesday.

ING's Tukker said economic growth concerns would play out in

the belly of the curve, especially 5-year bonds, which could

offer a better guide to expectations once any initial inflation

spike has subsided.

"Everyone's been focused very much on the front-end of the

curve, as in higher inflation expectations, more rate hikes and

therefore higher 2-year rates, but what's the scenario we're

looking at thereafter? Because rate hikes mean slower economic

growth," he said, adding that the ECB may eventually even have

to cut rates again.

Two-year yields have risen far more quickly than those on

five- or 10-year debt since the start of the war. Two-year

Schatz yields are nearly 55 bps higher than they were, while

five-year German yields are about 45 bps higher, compared with a

roughly 30-bp increase in benchmark 10-year yields.