(Updates in early afternoon trading in Europe)

By Harry Robertson

LONDON, Feb 27 (Reuters) -

Euro zone bond yields fell to a two-week low on Thursday,

pulled down by a fall in U.S. yields, before ticking slightly

higher on the back of some stronger-than-expected economic data.

Germany's 10-year bond yield, the benchmark for

the euro zone bloc, fell to 2.412% in early trading, the lowest

since February 11, and was last up 1 basis point (bp) at 2.451%.

Yields move inversely to prices.

Euro zone bond yields rose in mid-February as investors

braced for more defence spending as U.S. President Donald Trump

embarked on talks with Russia over ending the war in Ukraine.

But they have since dipped, influenced in part by a sharp

drop in U.S. Treasury yields as weak private sector and consumer

sentiment data has surprised investors, and also as incoming

German Chancellor Friedrich Merz has cast doubt on a big

military spending boost in the country.

​Italy's 10-year yield was 3 bps higher at

3.52%, and the gap between Italian and German yields

widened to 107 bps.

Yields rose steadily throughout the morning session after

opening slightly lower, nudged up by euro zone data.

Spanish inflation

came in slightly stronger than expected in February, at

2.9%.

Separate European Commission figures showed euro zone

economic sentiment

improved in February, with consumer price expectations

moving higher.

"Surveys so far this year, including Thursday's EC

survey for February, suggest the economy remains very weak while

inflationary pressures are still somewhat elevated," said Adrian

Prettejohn, Europe economist at Capital Economics.

He said price pressures may worry ECB policymakers. They

meet next week to decide on interest rates and markets are

expecting another 25 bp cut, to 2.5%, and see two or three more

reductions after that.

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

widened to 186 bps after falling to its lowest

since November at 182 bps on Wednesday.

Traders who bet on the future course of inflation foresee

the sharpest divergence for three years between the U.S. and

euro zone, partly driven by Trump's tariff threats, which he

renewed on Wednesday.

Yet the spread between U.S. and European yields has narrowed

as investors focus on recent tepid U.S. economic data, despite

sticky prices, and more euro zone defence spending.

Germany's two-year bond yield, which is more

sensitive to European Central Bank rate expectations, was last

flat at 2.066%, not far above its lowest since mid-February.