Euro zone yields rise, ECB 'rate hike genie' out of the bottle

(Updates throughout, adds comments, refreshes prices)

* ECB cites inflation risks, may discuss hikes

* Major banks now expect ECB April hike

* Italian bonds under pressure due to energy dependence, yields rise

By Amanda Cooper

LONDON, March 20 (Reuters) - Euro zone government bond yields rose for a third day on Friday, after a rout the day before, when inflation warnings from major central banks, including the European Central Bank, drove investors to swiftly price in interest rate rises this year.

In a rare week where most major central banks met to discuss monetary policy, the ECB on Thursday left interest rates unchanged, as expected. President Christine Lagarde said the euro zone was resilient and that low inflation meant it was "well positioned" to deal with what she called "a major shock that is unfolding".

ECB policymakers warned of growing inflation risks on Friday, but stopped short of calling for tighter policy, even as a host of brokerages started pencilling in rate hikes from as soon as April.

Most of the big G10 central banks, including the Federal Reserve and Bank of England, had held policy meetings over the course of Wednesday and Thursday and sounded a similarly cautious note on inflation risks. Two-year bonds around the world have taken the biggest hit as a result, particularly in Britain, where short-dated gilt yields rose by more than 30 basis points at one point on Thursday as prices tumbled. Two-year German Schatz yields ended the day up 12 bps at 2.566%, having hit nine-month highs. By Friday, they were up 3 bps at 2.6%. Prior to the conflict, markets showed traders were attaching a roughly 40% chance to another ECB rate cut this year. That has now flipped to one hike almost fully priced for June and a 60% chance of one in April.

"From the ECB speakers out since the war began, it appears that the ECB is highly divided. Markets are struggling to find firm footing, which is also why the price close to a 50/50 probability for an April hike," Kirstine Kundby-Nielsen, a senior analyst for fixed income and FX research at Danske Bank, said.

"I think it will be too soon for them to determine what the impact is on the medium-term inflation outlook. I therefore expect the ECB to be on hold in April," she said.

G10 CENTRAL BANKERS FOCUS ON INFLATION

Yields on 10-year Bunds, which serve as a benchmark for the wider euro zone, were roughly unchanged at 2.96%.

"If central bank commentary this week is anything to go by, inflationary concerns were given more significance over growth challenges from this shock given the memory of the recent high-inflation episode," Rohan Khanna, a strategist at Barclays, which is now calling for an April hike, said.

"We continue to think inflation risks and hence oil and gas price gyrations will remain front and centre for the EUR rates market - especially now that the ECB rate hike genie may be out of the bottle," he said, referring to next week's monthly business activity surveys.

ITALY UNDER PRESSURE Italian 10-year bond yields were up 6 bps at 3.846%, having risen on Thursday by as much as 12 bps at one point. Given Italy's greater dependence than many of its neighbours on imported energy, its bonds have come under more pressure since the start of the war in late February. BTP yields have risen nearly 60 bps since then, compared with a 45-bp rise in French and Spanish yields and a 34-bp rise in German Bund yields, which has brought the gap between those two - one market indicator of risk aversion - to nearly 80 bps, its widest since last October. (Reporting by Amanda Cooper; Editing by Shri Navaratnam and Chizu Nomiyama )