Euro zone bonds pull back; Iran uranium demand dashes hopes for peace

* Iran hardens stance on nuclear issue in peace talks, sources say

* Euro zone bond yields rise as oil prices jump and inflation concerns mount

* PMI data and Nomura economists highlight stagflation risks from Iran war (Updates pricing in European afternoon)

By Amanda Cooper

LONDON, May 21 (Reuters) - Euro zone government bond prices fell on Thursday after Reuters reported Iranian authorities would insist on any weapons-grade uranium remaining in the country, which snuffed out optimism over a possible peace deal and pushed up the price of oil. Iran's supreme leader has issued a directive that the country's near-weapons-grade uranium should not be sent abroad, two senior Iranian sources said, hardening Tehran's stance on one of the main U.S. demands at peace talks. The Brent crude oil price, which is already around 50% higher than it was prior to the war, jumped by 2% to $107 a barrel, sending investors out of fixed-income bonds, which pushed up yields. German 2-year Schatz yields, which are the most sensitive to shifts in expectations for rates and inflation, were last 3.5 basis points higher to 2.66%, while 2-year Italian yields were up 4.1 bps at 2.88%.

"The optimistic tones that we got yesterday really triggered this broad-based decline in yields," Kirstine Kundby-Nielsen, a senior analyst for fixed income and FX at Danske Bank, said.

"In terms of the conditions that the Iranian government has put out, the uranium guarantee was one of the central issues in the negotiations to end the war," she said.

Israeli officials have told Reuters that Trump had assured Israel that Iran's stockpile of highly enriched uranium, needed to make an atomic weapon, would be sent out of Iran and that any peace deal must include a clause on this.

INFLATION FEARS

Government bonds have sold off sharply this week, as investors priced in the prospect that energy prices would remain elevated for longer, which would stoke inflation and push up average borrowing costs. One-year euro zone inflation swaps were trading around 3.67%, well above the European Central Bank's 2% target rate and not far below late April's three-year high of 3.98%. Earlier on Thursday, a series of preliminary surveys of business activity for May, captured by a range of purchasing managers' indexes for the euro zone, as well as for Germany, France and Britain, showed companies across Europe were struggling with soaring input costs and uncertainty.

"Despite some bright spots in today's data, the PMIs continue to indicate that the Iran war is a stagflationary shock. Activity levels are depressed, with composite PMI output indices pointing to contraction, whereas output price indices are at elevated levels," economists at Nomura said in a note. Yields on benchmark 10-year German Bunds were 1 bp higher at 3.1%, not far away from their highest since 2011, while 10-year Italian BTP yields were 2.9 bps higher at 3.86%.

The difference between the two, which reflects the extra premium investors demand to hold Italian debt rather than German, is a key market-based indicator of risk appetite right now. That spread was last at 72.9 bps, well above where it traded prior to the war in late February, below 60 bps. Overnight, minutes from the U.S. Federal Reserve's most recent meeting showed more policymakers were open to the possibility of interest rate hikes as their concerns over inflation stemming from the Iran war intensified.

($1 = 0.8603 euros) (Reporting by Amanda Cooper, additional reporting by Sophie Kiderlin; Editing by Jan Harvey and Alex Richardson)