Euro zone government bond yields rose on Monday as investors concerned about the inflationary impact of an escalation in the Middle East conflict waited to see whether Iran will retaliate against U.S. attacks on its nuclear facilities.

Iran said on Monday that the U.S. strikes expanded the range of legitimate targets for its armed forces and called U.S. President Donald Trump a "gambler" for joining Israel's military campaign against the Islamic Republic.

Meanwhile, the euro zone economy flatlined for a second month in June, a survey showed on Monday.

German 10-year government bond yields, which serve as the benchmark for the wider euro zone, rose 2 basis points (bps) to 2.54%.

The yield on benchmark U.S. 10-year notes was up 2 bps at 4.39% in London trade.

Analysts argued that a spike in oil prices could disrupt the current narrative of more disinflationary than inflationary pressures in the euro area and the U.S., leading markets to scale back their bets on central banks' rate cuts.

"A protracted disruption of energy flows seems unlikely," said Holger Schmieding, chief economist at Berenberg, referring to oil and gas exports from the Gulf region.

The closing of the Strait of Hormuz, the crucial conduit for around 20% of global oil and gas shipments, is the key economic risk to watch.

"However, trying to throttle energy exports from the Gulf region would be a high-risk strategy for Tehran," Schmieding added, arguing that such a move would likely upset China and many other countries that do not usually side with the U.S.

Oil prices were up 1% in a volatile market on Monday after jumping to their highest since January.

"Even limited Iranian actions, with missile strikes, mines, cyberattacks, or jamming, could meaningfully impact tanker traffic and energy flows," said Hakan Kaya, senior portfolio manager at Neuberger Berman.

Money markets priced in a European Central Bank deposit facility rate at 1.80% in December from 1.78% late Friday.

A key market gauge of euro area inflation expectations rose to a fresh one-month high at 2.1345%, but still within striking distance of the 2% ECB target.

"Our base case would be a period of uncertainty lasting a few weeks, but without a sharp escalation (of the conflict)," said Mohit Kumar, chief economist Europe at Jefferies.

"Rates market has shown a muted reaction so far, and we agree with the assessment," he argued, adding he expects yields to move modestly higher.

Investors await a NATO summit later this week which is meant to be focused on heeding Trump's call to spend 5% of GDP on defence, from the current 2% goal.

The yield on the two-year German government bond – more sensitive to expectations for ECB policy rates -- was up 2 bps at 1.87%.

Italy's 10-year yields rose 1.5 bps to 3.54%. The Italian yield gap versus Bunds — a market gauge of the risk premium investors demand to hold Italian debt — stood at 100 bps.

(Reporting by Stefano Rebaudo, editing by David Evans)