March 3 (Bloomberg) -- European two-year bonds fell, pushing yields to their highest since December 2002, on rising speculation the European Central Bank will raise interest rates at least twice more this year.

Short-term bonds, among the most sensitive to changes in monetary policy, posted the biggest two-week decline since November after the ECB yesterday raised interest rates for a second time in three months and President Jean-Claude Trichet said the central bank is ``ready to do whatever is necessary.''

Trichet ``gave the impression they may go further than the market had been pricing in,'' said Bernard Walschots, head of research at Rabobank Groep in Utrecht, the Netherlands. ``Two- year bonds are going to sell off more during the year.''

Germany's benchmark two-year government bond yielded 3.11 percent by 5:10 p.m. in London, up from 2.90 percent two weeks ago, and the highest since Dec. 5, 2002. It may reach 3.68 percent by year-end, Walschots said.

The price of the 2.75 percent bond due December 2007 fell 0.37, or 3.7 euros per 1,000-euro ($1,200) face amount, to 99.40 in the past two weeks. Bond yields move inversely to prices. Ten- year bund yields rose 13 basis points, or 0.13 percentage point to 3.59 percent.

A private survey today showed growth in service industries, which makes up a third of the region's $9 trillion economy, accelerated last month. The purchasing managers' index rose to 58.2 from 57 in January, the report by NTC Research Plc for Royal Bank of Scotland Group Plc showed.

Increases `On Table'

``All the economic indicators are helping to confirm that further rate increases are on the table,'' said John Davies, a fixed-income strategist at WestLB AG in London.

The economy of the 12 euro nations will grow at the fastest pace since 2000 in the first three quarters of the year, the European Commission said today. Gross domestic product compared with the previous three month period will expand around 0.7 percent in the first, second and third quarters of 2006, it said.

Manufacturing expanded at the fastest pace in 19 months in the euro region last month, according to a similar survey of purchasing managers by NTC Research Ltd. for Royal Bank of Scotland Group Plc published March 1.

ECB policy makers boosted their benchmark rate yesterday for the second time in three months, raising it by a quarter point to 2.5 percent, after inflation in the region stayed above the bank's ceiling for 13 months. The ECB aims to keep inflation below 2 percent. Consumer prices rose 2.3 percent in February, a European Union report showed on March 1.

The ``adjustment of interest rates will continue to ensure that medium to long-term inflation expectations remain solidly anchored,'' Trichet said at a press conference in Frankfurt yesterday. ``Upside risks to price stability prevail.''

Narrowing Spread

Further interest-rate increases from the ECB should help contain inflation, which may help boost 10-year European bonds, which are more sensitive to price increases, according to Andrew Bosomworth, a fund manager at Pacific Investment Management Co., which manages the world's biggest bond fund.

``The ECB would probably like to see rates around 3 percent by the end of the year,'' said Munich-based Bosomworth. ``In the European market, it's better to be on the long end.''

The difference in yield, or the spread, between 10-year European bonds and shorter-dated euro region debt has narrowed in the last month, from 53 basis points on Feb. 3, to 48 basis points today.

The economy of the dozen nations using the euro may expand about 2.1 percent this year, up from a Dec. 1 forecast of about 1.9 percent, Trichet said at the briefing. Inflation may average 2.2 percent, rising from an earlier estimate of 2.1 percent.

Rate Forecasts

Traders have raised bets that borrowing costs will increase to 3 percent this year, futures trading shows. The yield on euro three-month interest-rate futures due in December and traded electronically on the London International Financial Futures Exchange, rose 12 basis points this week to 3.30 percent.

The contracts settle to the three-month euro interbank offered rate, which has averaged 0.16 percentage point over the ECB rate since the euro's start in 1999.

Speculation borrowing costs in the region will rise further has hurt benchmark debt, with European bonds of all maturities losing investors 1.1 percent, including reinvested interest, since the year began, according to Merrill Lynch & Co. data.

Debt maturing in one to three years sold by European governments handed investors a 2.06 percent return in 2005, the worst performance since 1999, Merrill data shows.

The yield on the benchmark French 10-year bond rose 11 basis points this week to 3.60 percent, and the yield on the similar- maturity Italian bond rose 10 basis points to 3.80 percent.

To contact the reporter on this story: Prashant Rao in London at prao3@bloomberg.net