LONDON - The difference between British and German bond yields stretched towards its widest in almost two-and-a-half years on Monday as the latest delay to Brexit prompted investors to sell British gilts.

British 10-year gilt yields rose by nearly two basis points in early trade to hit a session high of 1.235 percent -- their highest in a month -- pushing the spread over the equivalent German bund to 117 basis points.

That was the biggest gap since October last year and not far from its widest spread since November 2016.

The European Union last week agreed to delay Brexit until the end of October, averting the risk of an abrupt British departure from the bloc which would hurt the economy and probably prompt the Bank of England to cut interest rates.

When fears of a no-deal Brexit rattled investors in March, gilt yields had dipped below 1.0 percent for the first time since September 2017.

Also last week, the European Central Bank raised the prospect of offering more support for the struggling euro zone economy, pushing down the yields on German government debt.

"The market knows that the BoE has a bias to raise rates," David Owen, managing director at Jefferies International, said. "We are in a situation where Brexit has been delayed and could possibly be postponed - who knows"

British labour market data due on Tuesday could show further domestic inflation pressure, adding to the case for a BoE rate hike, he said.

(Writing by William Schomberg; Editing by Hugh Lawson) ((william.schomberg@thomsonreuters.com; +44 207 542 7778; Reuters Messaging: william.schomberg.reuters.com@reuters.net))