LONDON, Oct 9 (Reuters) - Euro zone government bond yields fell as the conflict between Palestinian militant group Hamas and Israeli forces sent investors toward safe-haven assets.

Italian bonds fell less sharply than their German peers, causing the closely watched spread between the two countries' 10-year bond yields to rise to its widest since January.

Germany's 10-year Bund yield, the benchmark for the euro area, was last down 12 basis points at 2.773%.

The German 2-year yield was down 9 bps at 3.04%. Bond yields move inversely to prices.

The Israeli military on Monday said it struck hundreds of Hamas and Islamic Jihad targets in the Gaza Strip overnight in retaliation for one of the bloodiest attacks in its history when Hamas militants killed hundreds of Israelis and abducted dozens more.

Later in the day, Israel said its trooped had killed armed infiltrators entering the country from Lebanon, raising fears the fighting could spread to a second front.

"The coming days are likely to be driven by geopolitical risks rather than fundamentals," said Mohit Kumar, chief economist for Europe at Jefferies.

"From a market's perspective, key would be whether Iran gets drawn into the conflict and what happens to oil prices over the coming weeks."

Oil prices climbed by as much as 5% as fears of tightening supply drove Brent crude futures as high as $89/barrel.

U.S. Treasury markets were closed for the Columbus Day holiday, although Treasury ETFs rallied as investors looked for safe assets.

"An escalation of the Israel-Hamas conflict might be bullish for U.S. Treasuries," said Saxo fixed income strategist Althea Spinozzi.

"Yet the risk of a rebound of commodity prices due to war and the upcoming 10-year and 30-year US Treasury auctions might limit yields' decline."

European Central Bank Vice-President Luis de Guindos said on Monday inflation was expected to stay on its downward trend but urged caution due to uncertainty over oil price moves in the wake of events in the Middle East.

Italy's 10-year bond yield, the benchmark for the euro area's periphery, was down 6 bps at 4.862%. It hit its highest since 2012 last week at 5.024%.

The gap between Italian and German 10-year yields to as much as 209 bps, its widest level since January. The spread is seen as a sign of investors sentiment towards the euro zone's more indebted countries.

Reuters reported on Monday that European Central Bank policymakers consider a spike in Italy's bond yields to be justified by the government's projection of higher deficits, but see it as a warning sign that should cool talk of ending a bond-buying scheme early, citing six sources.

"Italy is not managing to follow up the rally in core euro zone bonds," said Jussi Hiljanen, head of European rates strategy at lender SEB.

"It's been surprising that Italy has been doing so well this year but I think that has primarily been connected to risk appetite and data. Now the stock market is lower, Italian bonds are finding it increasingly difficult."

Euro area government bond supply is expected to slow this week, with just Italy and Germany scheduled to sell bonds, according to UniCredit analysts, while the EU is due to launch a syndicated transaction in the 20-year area of the curve. (Reporting by Samuel Indyk and Harry Robertson; Editing by Emelia Sithole-Matarise, Kirsten Donovan and Alison Williams)