* Traders double down on rate hike bets in Europe

* Government bond yields resume their surge, UK leads

* Investors ponder conflict duration, dollar falls

By Yoruk Bahceli and Samuel Indyk

LONDON, March 19 (Reuters) - Investors reassessing the

potential economic fallout from the war in Iran are selling

assets across the globe, from government bonds to stocks and

gold, reigniting fears that markets may become vulnerable to a

bigger dislocation.

Oil prices jumped to as high as $119 a barrel on Thursday as

Iran attacked energy facilities across the Middle East following

Israel's strike on its South Pars gas field.

European gas prices surged 22% in just one day, highlighting

the region's energy dependency.

The pain was felt globally and exacerbated by hawkish

signalling from central banks including the U.S. Federal

Reserve, with all G7 central banks meeting within less than 24

hours in a rare coincidence.

Traders, growing more worried about inflation risks, are no

longer confident the Fed will cut rates this year and boosted

the rate hike bets they've put on across Europe's central banks,

which they expect to be more responsive to higher energy prices

after a 2022 energy crisis sent inflation soaring.

These worries sent government bond yields from Britain to

Italy and the United States surging again on Thursday.

The pain was most stark in the UK, where two-year yields,

sensitive to interest rate expectations, jumped over 30 basis

points (bps). They were set for their biggest daily increase

since former Prime Minister Liz Truss's failed 2022 economic

plan.

In a sign that investors, who analysts say have priced in a

relatively short-lived conflict so far, are growing more

concerned, gold fell 4%. European stocks were

set for their second biggest daily fall since the conflict broke

out.

Even the dollar, a rare winner from the conflict, dropped

against peers on Thursday, falling 1% against the yen and 0.6%

against the euro .

"For the first time that bought energy infrastructure into

the conflict," Lloyds currency strategist Nick Kennedy said,

referring to the latest attacks.

"That is a clear escalation and you don't know where that

ends up, so markets are right to be a bit more cautious, as it

has crossed the Rubicon."

RATE HIKE BETS

The Bank of England vindicated traders' hawkish bets on

Thursday, when policymakers voted unanimously to keep rates on

hold, and some raised the prospect of raising rates.

Traders now price in two BoE rate hikes by year-end, having

expected it would cut rates at this meeting before the war. At

one point they priced in a high chance of a third move before

governor Andrew Bailey pushed back on market pricing.

At the ECB, which also met on Thursday, traders fully price

in two rate hikes and a strong chance of a third by December.

Euro area and U.S. short-dated bond yields surged about 10

bps .

The hawkish repricing first gained momentum following

Wednesday's Fed meeting.