(Updates prices at 1515 GMT)

By Sruthi Shankar and Alun John

Aug 8 (Reuters) -

Euro zone bond yields were set to finish little changed on

Thursday, reversing an earlier fall after better-than-expected

U.S. employment data eased some worries about the health of the

world's largest economy.

Germany's 10-year bond yield, the benchmark

for the euro zone bloc, was steady on the day at 2.27%, while

the two-year bond yield, was also little changed at

2.41%.

Each had been down around 5 bps earlier, but rose after

a U.S. Labor Department report showed the number of Americans

filing new applications for

unemployment benefits

came in at 233,000 for the week ended Aug. 3, compared with

an estimate of 240,000 in a Reuters poll of economists.

That caused markets to slightly reduce expectations of

Federal Reserve interest rate cuts, sending Treasury yields

higher and European yields higher in turn.

"I think that reaction marked another high for

sensitivity to the jobless claims as we look for signs of a

cooling labour market or recession," said Kenneth Broux, head of

corporate research FX and rates at Societe Generale.

That data is not always market-moving, but was in

particular focus after a weak U.S.

payrolls report

late last week ignited fears of an economic downturn that

could warrant bigger Fed rate cuts and drove significant

volatility across markets.

Stocks sold off around the world and U.S. and European

bonds rallied after that data, pushing Germany's two- and

10-year yields to multi-month lows. They rebounded on Tuesday.

Money markets show traders are pricing in about 100 bps

of further rate cuts from the Fed by the end of 2024, down from

around 110 earlier on Thursday, but well up from levels before

last Friday's data.

They anticipate 65 bps of further cuts from the European

Central Bank.

The unravelling of leveraged trades linked to the Japanese

yen, which has benefited in part from expectations of a hawkish

pivot from the Bank of Japan (BOJ), also contributed to the

recent big selloff in global stock markets.

A semblance of calm returned to markets on Wednesday after

BOJ Deputy Governor Shinichi Uchida said the central bank will

not hike interest rates when markets are unstable.

Italy's 10-year yield was flat at 3.70% on

Thursday, and the gap between Italian and German bunds

was at 143 bps.