LONDON, June 30, (Reuters) - The pound edged higher on Friday and was on track for a monthly gain of about 1.5%, boosted by a sharp rise in British bond yields across the month.

Yields have jumped in June as data has shown that Britain's inflation problem is more deeply entrenched than elsewhere, pushing the Bank of England to hike interest rates by an outsized 50 basis points last week.

Sterling was last up 0.12% at $1.263, and was set for a monthly gain of 1.49%.

The euro fell 0.3% against the pound, meanwhile. It was set for a very small monthly decline, after sliding almost 2% versus the pound in May.

Higher yields tend to boost a country's currency by making fixed income investments there look more attractive. That dynamic was in play again on Friday, said Lee Hardman, currency analyst at lender MUFG.

"Probably it's the usual driver in terms of UK yields are moving higher again today, more so than elsewhere," Hardman said.

Yields on both the 10-year and two-year UK government bonds were up about 6 basis points on Friday, to 4.44% and 5.29% respectively.

The two-year yield, which is particularly sensitive to interest rate expectations, has jumped by just under a percentage point in June. That's the biggest rise since the chaos unleashed by the UK's fiscal announcement in September.

The Bank of England raised interest rates to 5% last week but traders who bet on the future path of borrowing costs think they're likely to rise to around 6.2% by early next year. Economists recently polled by Reuters think a 5.5% peak is more likely.

Sterling is up 4.4% against the dollar this year but plenty of analysts have started to question whether those gains can continue if high interest rates start to weigh on growth.

"For now I think markets are generally viewing high yields as more of a positive for the pound," said Hardman. "That would only really flip around if the economy started to show more weakness in responding to rising yields."

Hardman said sterling could rise to $1.30 before becoming bogged down by economic concerns.

The U.S. dollar index - which tracks the currency against six major peers - was up 0.13% on Friday to 103.45.

The key data point for markets is U.S. personal consumer expenditure inflation, the Federal Reserve's preferred measure of price rises, due out at 1230 GMT.

(Reporting by Harry Robertson Editing by Mark Potter)