UPDATE 1-German bond yields at 2-year highs as inflation fears bite

* German 10-year bond yields rise to 0.77 pct

* 30-year bond yield at 2-year of 1.43 pct

* US 10-year yields at new 4-year highs

* Strong payrolls data continues to weigh

* Euro zone periphery govt bond yields http://tmsnrt.rs/2ii2Bqr

LONDON, Feb 5 (Reuters) - Long-term borrowing costs in Germany, the euro zone's biggest economy, rose to their highest levels in around two years on Monday as worries about resurgent inflation battered world bond markets.

Friday's U.S. payrolls report showed wages growing at their fastest pace in more than 8-1/2 years, fuelling expectations for both higher inflation and more interest-rate rises from the U.S. Federal Reserve than previously anticipated.

Futures markets now price in the risk of three, or even more, interest rate rises from the Fed this year.

"For a while now investors have assumed that we would probably get another two, or maybe even three rate rises this year," said Michael Hewson, chief market analyst at CMC Markets UK.

"Friday's data has prompted a readjustment of that calculus with the potential for a fourth, and this change is likely to drive the U.S. 10-year yield back to 3 percent in short order."

U.S. 10-year Treasury yields rose to fresh four-year highs on Monday at around 2.89 percent, setting the tone for European bond markets.

In Germany, the euro zone's benchmark debt issuer, 10-year bond yields rose to 0.774 percent, their highest since September 2015. German 30-year bond yields rose to two-year highs at 1.429 percent.

Two-year bond yields were down slightly on the day, leaving the German curve out to 10 years at its steepest since mid-2014 .

Bond markets across the world have started 2018 on a weak footing as strong economic data and signs of a pick in inflationary pressures stoke a perception that major central banks could step back from ultra-easy monetary policies sooner rather than later.

For now, U.S. bond markets are setting the tone for euro zone peers, said analysts, with many expecting 10-year Treasury yields to test 3 percent soon.

European Central Bank chief Mario Draghi is expected to speak later on Monday and could use the opportunity to warn against an "unwarranted rise" in borrowing costs, analysts at ING said in a note.

Southern European bonds, which have outperformed their top-rated peers in recent weeks, also succumbed to selling pressure with yields up as much as 3 basis points. That in turn pushed out spreads over German peers .

(Reporting by Dhara Ranasinghe; Editing by Toby Chopra)