LONDON, March 11 (Reuters) - Euro zone government bond

yields rose sharply on Wednesday, as traders increased bets that

a sharp rise in energy prices due to the raging U.S.-Iran war

will force the European Central Bank to raise interest rates

this year.

The war risks pushing the central bank into raising interest

rates sooner than previously thought, ECB Governing Council

member Peter Kazimir told Bloomberg in an interview published on

Wednesday.

The comments pushed money market traders to ramp up bets on

ECB rate hikes, seeing an 80% chance of an increase by July and

fully pricing in an increase by September. Traders had

previously seen a chance of rate cuts before the war broke out.

Germany's two-year bond yield, which is sensitive

to ECB rate expectations, was up 7 basis point (bp) at 2.345%.

On Monday, it had hit its highest since August 2024, at 2.476%.

"I'd say a reaction by the ECB is potentially closer than

many people think," Kazimir told Bloomberg. He also said, "For

the time being, we need to stay calm."

Andrzej Szczepaniak, senior European economist at Nomura,

said the move in ECB pricing was due to Kazimir's comments.

He added that surveys on inflation expectations will become

extremely important in coming months as officials decide how to

respond to an expected up-tick in inflation.

Germany's 10-year bond yield was up 4 bps at

2.901%, down from Monday's one-year high of 2.931%. Yields move

inversely to prices.

Italian bonds continued to underperform Bunds, in part

reflecting the country's greater reliance on oil and natural gas

imports and its weaker public finances.

Italy's 10-year bond yield was up 11 bps at

3.633%, although it kept below Monday's 11-month high of 3.785%.

Yields shot higher on Monday as oil prices surged to their

highest in almost four years, at close to $120 a barrel.

They have since fallen, along with energy prices, on hopes

the war could be shorter than feared at the start of the week

and that countries could release strategic petroleum reserves.

Brent crude oil, the global benchmark, fluctuated on

Wednesday and was up 5% at $92.20 a barrel. It stood at just

over $70 a barrel before the conflict broke out.

The International Energy Agency has proposed the largest

release of oil reserves in its history to tame prices, the Wall

Street Journal said on Tuesday, citing officials familiar with

the matter.

Oil prices dropped roughly 11% on Tuesday after U.S.

President Donald Trump told CBS News the war was "very

complete".

"Markets are welcoming the thought of the Middle East

conflict ending soon, but oil prices tell us that we're not

there yet," said Michiel Tukker, senior European rates

strategist at ING.