July 22 (Reuters) - Australian shares notched their best week since mid-March, even though markets closed flat on Friday as losses in energy stocks because of an overnight drop in oil prices countered gains in heavyweight banks.

The S&P/ASX 200 index slipped 2.8 points, or 0.04%, to 6,791.5 after two straight sessions of gains. The benchmark rose 2.8% for the week.

Energy stocks dipped 1.2% after oil prices fell sharply overnight on higher U.S. gasoline stockpiles and as a European Central Bank rate hike stoked demand worries.

Shares of Woodside Energy slipped 0.6%, extending its fall from the previous session even after the company said the cut in its production outlook was due to a change in conversion factors and did not reflect any change in physical product volumes.

Other sector majors Santos and Ampol fell 3% and 1.2%, respectively.

Financials rose 0.6%, with Australia and New Zealand Banking Group climbing 3%, while rival Westpac Banking Corp advanced 1.1%. The financial index gained 4.4% for the week in its best week since mid-March.

"I think it's just a relief rally in a bear market. We're starting to see bond yields drop, which is benefiting more growth-oriented companies," said Cameron McCormack, a portfolio manager at VanEck Australia.

Australia's 10-year bond yields dropped 10.6 basis points to 3.464% on Friday, the sharpest fall since July 6.

"That basically means that banks are earning more money and they can earn more as rates continue to rise and yields continue to push up," said Jessica Amir, a market strategist at Saxo Capital Markets.

Australia will report its quarterly inflation data next week, and McCormack expects a high single-digit reading will give the central bank further cause to maintain its hiking cycle.

Shares of Insurance Australia Group closed 1.4% lower after the country's top general insurer warned of tighter-than-guided margins due to higher claims on account of adverse weather events. Rival QBE Insurance fell 2.1%.

New Zealand's benchmark S&P/NZX 50 index slipped 6.57 points, or 0.06%, to 11,263.19. (Reporting by Harshita Swaminathan; Editing by Subhranshu Sahu)