* Government suspends bond sales

* Yields fall slightly in response

* Markets expect central bank's key rate decision

* Inflationary expectations highest since March 2022

By Gleb Bryanski and Darya Korsunskaya

MOSCOW, July 21 (Reuters) - Yields on long-term Russian

state bonds fell slightly on Tuesday in response to the

government's move to suspend their sales and stabilize the

market, after Ukrainian attacks on refineries slowed the pace of

monetary easing and pushed inflation up.

The yields on 10-year government bonds had risen to about

17% from around 15% in recent weeks, ramping up the cost of

borrowing and debt servicing for the government while devaluing

commercial banks' holdings of the bonds.

On Monday, the Finance Ministry, which recently cancelled three

bond auctions, announced it would postpone bond sales

indefinitely, a decision seen by the market as long overdue in

the current situation.

"The decision reflects the ministry's reluctance to borrow

at high interest rates," said Natalya Orlova from Alfa Bank, who

expects the government to keep the suspension in place for at

least another two months.

Russia's sovereign debt is currently around 18% of gross

domestic product (GDP), below the 20% level considered safe by

the government.

However, high rates have pushed up Russia's debt servicing

costs, which are now higher than those for many countries with

large debt.

The decision to suspend bond sales may affect the

government's plans to raise money to cover the budget deficit,

which rose to 2.5% of GDP in the first half of the year, well

above the full-year target of 1.6% of GDP, amid increasing

spending to sustain the war in Ukraine.

QUEUES FOR FUEL AND HUMAN EMOTIONS

The Russian stock market is also down by more than 25% this

year, with the decline accelerating in June when attacks on

refineries led to fuel shortages across the country and queues

at pumping stations.

The market turmoil may also lead to losses for banks, major

holders of government bonds and corporate stock.

Before the attacks on refineries, the central bank had been

cutting the key interest rate as the inflation rate came down,

with yields on long-term state bonds also edging lower. In June,

inflation started rising again amid attacks and fuel shortages.

In June, the central bank cut the key rate by 25 basis

points, less than expected, citing rising fuel prices as one of

the risks. The central bank is expected to keep the key rate on

hold at the upcoming July 24 meeting.

Analysts polled by Reuters expect the central bank to raise its

forecast for the average key rate next year, in a major blow to

the Kremlin's plans to speed up economic growth, currently

expected at 0.4% this year.

Russian household inflation expectations, an important gauge

the central bank is looking into before the key rate decision,

rose in July to the highest level since the market turmoil in

March 2022, the first full month of the war in Ukraine.

"This likely reflects the June scene outside the window with

queues for fuel and universal human emotions about it," said

economist Dmitry Polevoy, adding that the new data will be a

significant factor in the key rate decision this week.

(Writing by Gleb Bryanski, Editing by William Maclean)