* Protracted conflict shifts markets' focus to growth

fallout

* Central banks walk tightrope; higher-for-longer rates

expected UK two-year yield nearly up 100 bps in March

* Germany's up 69 bps, U.S. up 50 bps

(Adds European levels, updates Monday's prices with morning

European trading)

By Rae Wee and Alun John

SINGAPORE/LONDON, March 30 (Reuters) - Global government

bond prices were set for their biggest monthly fall in years as

investors weighed the risks from a prolonged war in the Middle

East on inflation and growth.

As market focus shifts towards the economic fallout of the

conflict, now entering its second month, the selling in

rate-sensitive short-dated bonds is starting to abate.

But bond markets from the U.S. to Europe and Asia were still

nursing heavy losses.

The two-year U.S. Treasury yield - which moves

inversely to its price - was set for a monthly rise of around 50

basis points, its largest since October 2024. It was last down

roughly 5 basis points at around 3.87%.

Short-dated UK and Italian bond yields are set to end March

up more than 80 bps each, while Japanese bond yields have risen

to three-decade highs.

The move in the interest-rate-sensitive bonds comes as

markets scrapped earlier assumptions on Federal Reserve easing

this year.

The benchmark 10-year Treasury yield is up 44 bps on the

month to around 4.39%, though also trading lower on Monday,

Analysts said Monday's tick lower could be a sign that

worries about the impact of the war on global growth might start

to take precedence over its impact on inflation which have

dominated since it began.

"Now that the reality is sinking in that perhaps the oil

price might stay high for a bit longer, given that it's hard to

see an end to the war anytime soon, the growth impact is

starting to become more of a focus," Moh Siong Sim, a strategist

at OCBC, said.

Oil prices remain firmly above $100 per barrel, compared

with $70 in late February and are set to end March with their

biggest percentage gain since at least 1988.

BIGGER MOVES IN EUROPE

Bond price moves in Europe have been more dramatic, and

markets now price two or three rate hikes from the European

Central Bank and Bank of England this year - in the BoE's case

having swung from seeing two rate cuts before the war.

Britain's two-year yield has risen 98 basis points this

month, its most since 2022's market turmoil during Liz Truss'

short-lived premiership, while the 10-year yield is up 77

bps.

Germany's two-year yield has jumped 69 bps to 2.66% and its

10-year 45 bps, and hit a 15-year high of 3.13% last week.

Moves in Italy, which investors see as more exposed to the

energy shock than other euro zone peers, are almost comparable

with Britain - its two year yield is up 85 bps and its 10-year

78 bps on the month.

But euro zone bond yields were also a touch lower on Monday,

potentially caught up in the same shift in narrative towards

growth worries.

"It's a very difficult situation for the ECB and every

central bank in this stagflation scenario to balance the risk of

inflation ... and not hurting the economy even more by raising

rates too much," Berenberg senior economist Felix Schmidt said.

CHINA OUTPERFORMS

In the Asia-Pacific region, Australia's three-year bond

yield was up about 50 bps this month, the most in 17

months, despite easing more than 9 bps on Monday to around

4.72%.

Japan's 25-bps monthly rise in its 10-year yield

would mark the steepest advance since December.

But Chinese government bonds have held up relatively well as

investors bet the world's second-largest economy will be better

insulated from the oil shock due to its ample crude stockpiles,

dominance in green energy and subdued inflation.

Chinese two-year bond yields have fallen more

than 11 bps, set for their largest monthly fall since December

2024.