Euro zone bond yields fall further after Iran peace deal

(Updates with European morning trading)

* Money markets price 30 bps of ECB tightening by year-end

* German 10-year Bund yield falls 2.5 bps at 2.925%, its lowest since April 8

* The Federal Reserve is widely expected to leave rates unchanged on Wednesday

By Samuel Indyk

LONDON, June 16 (Reuters) - Euro zone government bond yields fell for a fourth day on Tuesday, hitting multi-week lows, following a preliminary agreement between the U.S. and Iran to end their war and reopen the Strait of Hormuz.

News of the agreement to reopen the waterway, through which one-fifth of the world's oil and gas usually flows, has pushed front-month Brent crude futures to their lowest level since March 4.

Lower energy prices have dampened worries about higher inflation and slowing growth, and helped reduce expectations for further policy tightening from major central banks, including the European Central Bank.

Germany's 10-year Bund yield, the benchmark for the euro zone, was down 2.5 basis points at 2.925%, its lowest since April 8. Italy's 10-year yield was down 4 bps at 3.639%, its lowest since March 18.

Germany's two-year yield, which is sensitive to changes in ECB rate expectations, was down 1.5 bps at 2.554% after falling to a two-week low of 2.547% on Monday.

ECB HIKE EXPECTATIONS TRIMMED Last week, the ECB was the first major central bank to tighten policy since the outbreak of the war, followed by a Bank of Japan rate hike earlier on Tuesday.

Investors, however, have trimmed their expectations for further hikes from the ECB following the peace deal, even though the details of the deal are unclear. Money market futures are fully pricing in 30 bps of tightening by the end of the year, implying one quarter-point hike and around a 20% chance of another.

"The (Middle East) deal probably gives the ECB cover to skip the next meeting and buys them time to evaluate things," said Lauren Van Biljon, senior portfolio manager at Allspring Global Investments.

"The ECB are tightening this year, they might have to unwind this in 2027 and maybe that's when we see yields really converge back to where they were at the end of last year, beginning of this year."

Germany's 10-year yield is still up almost 30 bps from its pre-war level of 2.65%. ECB President Christine Lagarde on Monday welcomed news of the peace deal, but other policymakers were more cautious. Germany's Joachim Nagel said there would be no immediate relief on inflation because it would take months to restore oil supply to its pre-war level. ECB chief economist Philip Lane is scheduled to participate in a Reuters NEXT event on Tuesday, which could provide further clues on the outlook for monetary policy. The market is also watching the Federal Reserve, which kicks off a two-day policy meeting under new chair Kevin Warsh on Tuesday.

The U.S. central bank is widely expected to keep the fed funds rate target range at 3.5%-3.75% when it announces its decision on Wednesday, while futures imply around an 80% chance of a quarter-point hike by year-end. (Reporting by Samuel Indyk, editing by Milla Nissi-Prussak and Hugh Lawson)