(Updates as of 1100 GMT.)

By Joice Alves

LONDON, May 2 (Reuters) - Euro zone bond yields edged

lower on Thursday after the U.S. Federal Reserve signalled it

may have to leave interest rates at an elevated level for longer

but shot down talk of raising them again.

Fed Chair Jerome Powell told reporters on Wednesday that

inflation was too high and progress in bringing it down was

uncertain, setting the stage for a potentially extended period

with the benchmark policy rate in the 5.25%-5.50% range that has

been in place since July.

A big surprise for markets, which helped push U.S. yields

lower on Wednesday, was the larger-than-expected reduction in

balance sheet runoff under the Fed's quantitative tightening

program.

U.S. treasury yields fell after the announcement

while European markets reacted on Thursday, with the German

10-year bond yield, the benchmark for the euro zone,

down 3.9 basis points (bps) to 2.54%.

"The main flashes from the Fed last night were that...

Powell signalled that rate hikes remained unlikely and the Fed

announced a slightly-larger-than-expected slowing of QT," said

Deutsche Bank strategist, Jim Reid.

The spread between U.S. 10-year Treasuries and German Bunds

widened 0.6 basis points to 206 bps.

Markets are now pricing in only one Fed rate cut this year,

in November, after pricing in as many as six earlier this year,

according to the CME FedWatch Tool.

Powell's words have not disrupted market bets on an ECB rate

cut in June, but beyond that the path is unclear.

Government bonds remain highly sensitive to changes in

expectations for central bank interest rates. Market pricing

currently indicates a roughly 70% chance of a 25-basis-point ECB

cut in June, and two or three cuts in total this year.

"Whilst the Fed is set to stand firm on rates until it is

sufficiently confident inflation is falling sustainably to 2%,

the baseline view that policy will eventually be loosened

remains largely intact," said Ryan Djajasaputra, economist at

Investec.

The German two-year bond yield, which is more

sensitive to ECB rate expectations, was down 3.2 bps at 2.99%.

Italy's 10-year yield was down 5.9 basis points

at 3.85%, and the gap between Italian and German 10-year yields

widened 2 basis points to 131 bps.