Euro zone yields rise on fear US-Iran war will drag on

LONDON, May 11 (Reuters) - Euro zone yields rose on Monday after U.S. President Donald Trump's swift rejection of Iran's response to a U.S. peace proposal sent oil prices surging and underscored worries that inflation will force meaningful rate hikes from the European Central Bank.

Germany's rate-sensitive two-year yield rose just over 2 basis points to 2.62% as markets were close to pricing in an ECB rate hike at its June meeting. They are fully pricing two 25 basis point hikes across the ECB's three meetings to September.

Germany's 10-year yield, the euro zone benchmark, rose 2 bps to 3.02%.

Benchmark Brent crude June futures were 3.7% higher at $105 a barrel on Monday, below their late April highs but well above pre-war levels, and ECB policymakers have warned they are ready to act should high energy prices spill over into broader inflation. Governing Council Member Martin Kocher said in an interview published on Monday that "if the situation does not improve significantly, there will be no avoiding an interest rate move in the near future."

"What's clear is that if the war drags on and energy prices remain high, the risk of second-round effects will increase," said Kocher, who is also the Austrian central bank governor.

Other euro zone yields were moving broadly similarly to German ones. Italy's 10-year yield was up 3 basis points at 3.77%.

(Reporting by Alun John; Editing by John Mair)