(Updates with further comment and context)

* Markets slightly trim 2026 ECB rate hike bets

* ECB leaves rates unchanged, flags trade-offs

* Rate-sensitive bond yields fall as oil drops

By Harry Robertson and Amanda Cooper

LONDON, April 30 (Reuters) - Traders on Thursday

slightly tempered their bets that the European Central Bank will

hike interest rates three times this year, after policymakers

flagged the trade-off between rising inflation and the hit to

growth from higher energy prices.

The ECB held rates at 2%, with President Christine Lagarde

saying officials were conscious of the risks to the economy from

the war but had also debated a hike at length.

Two sources close to the discussion later told Reuters the

ECB is likely to raise interest rates at least twice, starting

in June.

Government bond yields across the bloc dipped after the decision

as traders trimmed their wagers on rate hikes this year.

Money markets now price in a roughly 88% chance of a

quarter-point hike in June, having fully priced in such a move

earlier on Thursday.

They expected around 72 basis points of hikes by year-end,

indicating they were no longer certain the ECB would execute

three 25-bp increases this year.

"Clearly they (ECB policymakers) want to keep their options

open so that they can remain data dependent and have time until

the next meeting to see how inflation develops," said Jill

Hirzel, senior investment specialist at Insight Investment.

"They've got just the inflation mandate, but they consider

the impact on growth as well," Hirzel said, adding that she

leans towards expecting two rate hikes this year.

Two-year German bond yields, sensitive to ECB

rate expectations, were last down 7 bps at 2.65%.

A fall in oil prices from a four-year high helped drag

yields lower - as did data from earlier in the session showing

that the euro zone economy barely grew in the first quarter.

The tepid growth underscores how vulnerable Europe, a major

importer of oil and gas, is to rising energy prices and the

tricky situation facing the ECB.

Germany's IMK institute sees a 34% chance the bloc's largest

economy slips into recession in the second quarter, up from 12%

in March.

MARKETS VOLATILE AS WAR CLOUDS OUTLOOK

Markets are grappling with a fast-moving situation and

expectations have swung wildly.

Two weeks ago, oil prices were down significantly in the

wake of the April 8 ceasefire and traders sharply reduced ECB

rate-hike bets, only for them to ramp up again over the last

week.

Just on Thursday, benchmark Brent crude oil prices

rose to their highest since 2022 at $126.41 before falling

sharply to $114.

"It's difficult for central bankers," said Joost van

Leenders, senior investment strategist at Van Lanschot Kempen,

adding that he thinks pricing of three hikes from the ECB this

year "is a bit aggressive".

The Bank of England on Thursday held rates at 3.75% but

British bond yields fell as traders also detected a slight

reticence to raise rates. The U.S. Federal Reserve kept rates

steady on Wednesday.

"These central banks are buying time to understand how long

the conflict goes on (and) the oil price remains persistently

high, and possibly gathering information at any level on

possible second-round effects," said Alessia Berardi, head of

global macroeconomics at the Amundi Investment Institute.

The euro fell very slightly after the ECB's decision, but

then climbed to trade 0.5% higher at $1.173. European

stocks extended their gains and rallied 1.3%.

Pictet Asset Management lead economist Nikolay Markov said

his firm expects the ECB to raise rates twice this year.

Yet he also said that a longer-than-expected closure of the

key Strait of Hormuz and a sustained rise in oil to $150 a

barrel could push euro zone inflation to 6%, double its rate in

April.