LONDON, July 10 (Reuters) - Euro zone bond yields fell

alongside oil prices on Friday, but German yields were still on

track for their biggest weekly rise in more than a month after

this week's escalation in the Iran war.

The two-year German yield, which is sensitive to

expectations for European Central Bank interest rates, is up 10

basis points this week, its biggest weekly rise in five weeks.

The 10-year yield, the benchmark for the euro zone, has risen by

a similar amount, its biggest weekly increase since early May.

Renewed U.S.-Iran attacks led traders to increase bets on

the chance of two rather than one more ECB rate hike this year

following June's move, pushing yields higher.

On Friday, however, euro zone bond yields fell for a second

straight session as traders bet the latest escalation was

unlikely to develop into a full-scale war. Brent crude fell to

around $75 a barrel after rising above $80 earlier in the week.

Washington remains committed to finding a resolution with

Iran and "technical talks continue", a U.S. official said.

Germany's 10-year yield was last down 1 bp to 3.04%, below

the more than one-month high of 3.09% touched on Thursday. The

two-year yield fell a similar amount to 2.64%.

Traders were pricing in 32 bps of ECB rate hikes by year-end

on Friday, implying one further increase and roughly a 30%

chance of a second. That was down from 36 bps earlier in the

week.

A rally in Japanese government bonds overnight, after

reports that Tokyo wants to explore ways to encourage pension

funds to increase holdings of domestic assets, also supported

European bonds on Friday, Commerzbank analysts said. However,

they warned this was a risk in the longer run if Japanese

investors repatriate funds from abroad.

Japan's foreign bond holdings "have been declining gradually

in recent years but remain significant. In Europe, France is

most exposed with Japanese investors still holding some €128

billion at the end of last year," the analysts said.