* Investors trim ECB hike expectations

* Bond yields following oil price movements

* German 10-year yield hits lowest since July 15

(Updates for late European morning trading)

By Samuel Indyk

LONDON, Aug 5 (Reuters) - Germany's 10-year government bond

yield fell for a third consecutive day on Wednesday, driven by

optimism over a potential U.S.-Iran deal to reopen the Strait of

Hormuz.

U.S. President Donald Trump said that the U.S. and Iran were

having "very good discussions", fuelling expectations of an end

to the five-month conflict that has severely disrupted energy

supplies from the Middle East.

Growing confidence that a deal can be reached pushed Brent

futures to almost $78 per barrel early on Wednesday,

their lowest in more than three weeks, although they have since

ticked higher after Yemen's Iran-aligned Houthi rebels said they

attacked a Saudi oil tanker in the Red Sea.

"Yields are just following what's happening with the oil

market," said Mohit Kumar, chief economist Europe at Jefferies.

"In July you had a massive rally in oil and yields rose. Now

oil is coming off, so yields are coming off as well."

Germany's 10-year yield, the euro zone

benchmark, was last down 1.5 basis points at 3.104%, after

earlier hitting its lowest since July 15 at 3.089%. Bond yields

move inversely with prices.

LESS TIGHTENING?

The European Central Bank in June became the first major

central bank to tighten policy since the start of the war in

February, but kept interest rates on hold last month, signalling

that it needed more time to assess the impact of the energy

price spike.

Policymakers are watching for signs of second-round effects,

where higher energy prices feed into wages and the cost of other

goods and services, making inflation more entrenched.

Inflation in the 21 nations that share the euro currency

ticked up to 2.9% in July, data showed last week.

But falling energy prices this week have softened worries

about higher inflation and a slowdown in growth, and helped

reduce expectations for further policy tightening from the ECB.

Futures markets are now pricing in just 36 bps of tightening

from the ECB by the end of the year, implying one more

quarter-point hike and around a 45% chance of a second. On

Friday, investors had been pricing in around 44 bps of

tightening this year.

Germany's 2-year yield, which is sensitive to

changes in ECB policy expectations, was little changed on the

day at 2.722% after earlier falling to 2.6951%, its lowest since

July 13.