Euro zone short-dated yields dip with focus on this week's ECB meeting

(Updates with morning trading)

By Alun John

LONDON, April 27 (Reuters) - Euro zone short-dated government bond yields dipped on Monday, as no major weekend developments in the U.S.-Israeli war with Iran to react to left traders to focus on this week's European Central Bank meeting.

While policymakers are expected to keep rates steady on Thursday, investors will be scrutinising their statement and President Christine Lagarde's press conference for any expectations for the euro zone economy and what policy response might be appropriate.

Markets currently see roughly a 20% chance that the ECB hikes rates by 25 basis points this week, around a 75% chance they do so by their June meeting and expect at least one such move and potentially two by their July meeting.

That pricing was marginally less on Monday compared to Friday, pushing Germany's two-year yield down 2 basis points to 2.54%.

Germany's benchmark 10-year yield meanwhile was a whisker higher at 3.02%.

Before the war, markets expected the ECB to be on hold throughout this year, but traders dramatically reassessed those expectations in March, betting policymakers would feel obliged to raise rates to prevent higher energy costs spilling over into inflation more broadly.

Thursday's meeting will give investors their latest insight into the ECB's thinking.

"If the ECB signals that June is 'live', front-end yields could move higher. However, a more cautious tone appears more likely, reinforcing patience and limiting the extent to which markets price in additional tightening," said Annalisa Piazza, fixed income portfolio manager at MFS Investment Management.

She said that as financial conditions were already tightening and growth concerns mounting, "the ECB is unlikely to encourage expectations of multiple near-term hikes".

This, she said, could send shorter-dated yields lower.

Potentially offering some support to the view that rate-setters can afford to be a bit cautious with rate hikes, an ECB survey published on Monday showed that while euro zone firms expect inflation to surge in the near term on the Iran conflict, longer-term bets remained steady and wage growth is seen moderating.

Other countries' bonds were moving in line with the benchmark. Italy's two-year yield was also down 2 bps at 2.77%, while its 10-year yield was flat at 3.81%.

As well as the ECB meeting, traders will also be watching a raft of other major central banks. The Bank of Japan announces its policy decision on Tuesday, the Federal Reserve on Wednesday and the Bank of England on Thursday.

All are expected to keep rates steady.

(Reporting by Alun John; Editing by Thomas Derpinghaus and Emelia Sithole-Matarise)