(Updates prices, updated analyst quotes on UK gilts,)

By Lucy Raitano

LONDON, May 8 (Reuters) - Euro zone government bonds

steadied on Friday as renewed clashes between the U.S. and Iran

sent oil prices higher, although moves were muted compared to

volatile sessions earlier this week.

Benchmark 10-year German bund yields were unchanged at

3.009%. Two-year Schatz yields rose 2 bps to 2.5916%

, a second day of gains after their biggest daily fall

in a month on Wednesday.

Brent oil prices - a key driver of broader financial

markets since the war started in late February - rose 0.2% to

$100.09 a barrel, paring earlier gains that were already a

modest swing compared with the volatility earlier this week.

Investors are awaiting U.S. nonfarm payrolls due later in

the session for a read on the U.S. economy, with a slowdown

anticipated by economists surveyed by Reuters.

UK gilts were in focus after British Prime Minister Keir

Starmer's Labour Party suffered heavy early losses in local

elections.

Despite concerns of political upheaval, UK gilts were

outperforming major peers, with the 10-year yield

down 5 bps to 4.893%.

"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 7.3 bps to 5.56%

.

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 is 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 unchanged at 3.749%

.