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.