* Money markets fully price in a rate hike by July and a

second move by year-end

* Economists wary of ECB hiking rates soon

* Italian and French spreads around 10 bps wider than

before the conflict

By Stefano Rebaudo

March 12 (Reuters) - German government bond yields were

hovering around their multi-year highs on Thursday after markets

boosted bets on European Central Bank rate hikes as conflict in

the Middle East fuelled inflation fears.

Oil prices jumped on fears that the conflict and related

oil-flow disruptionsthrough the Strait of Hormuzwould continue

for an extended period.

Germany's 10-year government bond yield was flat

at 2.93%, after hitting 2.963%, its highest since October 2023.

Money markets were fully pricing a European Central Bank rate

hike by July, and a 60% chance of a second

increase by December.

In late February, before the outbreak of the war, traders had

attached a roughly 40% chance to a rate cut from the ECB before

year-end.

NO RATE HIKE EXPECTED SOON

Economists are inclined to rule out any move at next week's

policy meeting, arguing that the Strait of Hormuz would need to

be closed for several months to prompt ECB monetary tightening.

"The euro area is facing a new inflation shock, but that is

still likely to be temporary and modest," said Holger

Schmieding, chief economist at Berenberg.

"It's a political bet, namely that Donald Trump has no

interest in high petrol prices for American consumers for a long

time and he will look for a way out," he added, arguing that six

months of closure of the Strait of Hormuz would turn a policy

tightening in 2026 into a serious risk.

However, Wednesday's comments from policymakers fuelled

expectations of a more hawkish ECB stance.

"It's not our base case scenario, but if we assume that

there will be some negative (inflation) second-round effects,

thinking that the ECB has to deliver one or two hikes this year

is not unreasonable," said Reinhard Cluse, chief European

economist at UBS.

ECB board member Isabel Schnabel said the post-pandemic spike in

inflation had left scars on companies and consumers, who now

knew that prices could rise fast and settle at a higher level,

after policymakers promised swift action if they thought higher

inflation might become entrenched.

"We stick to our assessment that the ECB will end up not raising

rates this year," said Hauke Siemssen, rate strategist at

Commerzbank.

"However, markets seem likely to price adverse scenarios for

the time being as the hawkish talk continues to keep inflation

expectations in check," he added, advising against Bund longs

for now.

SPREADS WIDEN

Italy's 10-year government bond yields rose 4.5

bps to 3.60%.

Although German bonds lost some of their safe-haven appeal,

spreads edged wider when war developments hurt risk appetite.

The yield gap between Italian government bonds and Bunds widened

to 73 bps. It had been at 63 bps before the attack on Iran and

hit 53.50 in mid-January, its lowest level since August 2008.

French spread versus Bunds was at 65 bps from

57 bps before the Middle East conflict.

(Reporting by Stefano Rebaudo; Editing by Amanda Cooper, Kevin

Liffey and Chizu Nomiyama )