June 16 (Reuters) - Euro zone government bond yields

rose on Monday as investors focused on the inflationary impact

of a rise in oil prices while awaiting the Federal Reserve's

policy meeting later this week.

Iranian missiles struck Israel overnight, fuelling concerns

among world leaders at this week's G7 meeting that the battle

between the two old enemies could escalate into a broader

regional conflict.

Analysts said a rise in oil prices will fuel inflation, but

there are also downside risks for the economy.

Brent crude futures were volatile on Monday, following a 7%

surge on Friday.

German 10-year Bund yields rose 4 basis points

(bps) to 2.58%, having marked a low of 2.422% on Friday, the

lowest since March 3. Yields on the two-year Schatz

were up 3 bps at 1.89%.

"Our base case is that the current escalation could last for

a few weeks but should overall remain contained and not spread

into a wider conflict," said Mohit Kumar, chief economist of

Europe at Jefferies.

"Our bias for oil prices remains between $60 and $80. If we

remain in that range, beyond near-term spikes, our overall macro

picture would remain unchanged," he added, arguing that a rise

to $100 would lead to a revision of Jefferies macro views.

Money markets priced in a European Central Bank deposit

facility rate at 1.79% by December from

1.75% early in the session. They also indicate a 50% chance of

an ECB easing move in September from 60%.

ECB official remarks underline inflation risks and the need

for the central bank to remain vigilant.

The ECB should keep all of its options open for future

policy moves amid exceptional uncertainty, Bundesbank President

Joachim Nagel said on Monday.

Analysts argued the central bank is keen on stopping rate

cuts to avoid being in a world with limited policy room.

The ECB will pay more attention to the side effects of easy

money in the future, the ECB's Vice-President Luis de Guindos

told Reuters.

Monetary policy decisions from the Bank of Japan and the

Bank of England are also top of the agenda this week.

The Fed is expected to hold interest rates steady, with

investors focused on new central bank projections.

Citi said it expected a neutral to hawkish FOMC given the

still-large uncertainty around the path of inflation, especially

with the recent increase in oil prices.

Italy's 10-year bond yield was up 4 bps at

3.54%, with the spread between Italian and German yield at 93

bps. It hit 84.20 bps last week, its tightest since March 2015.