(Updates after U.S. jobs data)

By Harry Robertson and Stefano Rebaudo

Oct 4 (Reuters) -

Euro zone bond yields leapt on Friday after data showed U.S.

jobs growth was stronger than expected in September, weakening

the case for further outsized interest rate cuts from the

Federal Reserve.

Data showed

U.S. nonfarm payrolls rose by 254,000 in September,

compared to 159,000 in August, well above economists'

expectations of a 140,000 increase.

Germany's two-year yield was last up 10 basis

points (bps) at 2.175%, having stood 7 bps higher at 2.139%

before the U.S. data.

The yield, which is particularly sensitive to European

Central Bank interest rate expectations, fell to 1.987% on

Tuesday, its lowest level since December 2022, in the wake of

weak

euro zone inflation

data. Yields move inversely to prices.

Yet it has rebounded since then as data has suggested

the U.S. economy remains strong and as oil prices have jumped on

the back of the widening of conflict in the

Middle East

.

"Today's jobs figures suggest the Fed's action is

working well to support its full-employment mandate," said

Richard Flynn, managing director at Charles Schwab UK.

"With high inflation largely in the rear-view mirror,

this could be less good news for markets, as it may slow the

pace of future rate cuts."

The size and important of the U.S. economy and dollar

mean they tend to impact bond markets and central banks around

the world.

Germany's 10-year bond yield, the benchmark

for the euro zone bloc, was last up 8 bps at 2.219%, around its

highest since mid-September. It hit 2.011% on Tuesday, its

lowest level since January.

Traders in money markets slightly trimmed their bets on

ECB rate cuts after the data, which showed the U.S. unemployment

rate unexpectedly dipped to 4.1% last month.

They last saw an 80% chance of another ECB rate cut in

October, down from around 85% earlier in the day.

Oil prices - one of the main drivers of consumer inflation -

were subdued on Friday, but remained on track for strong weekly

gains, as investors weighed the prospect of a wider Middle East

conflict disrupting crude flows.

U.S. President Joe Biden said he did not believe there would

be an "all-out war" in the Middle East, after flagging on

Thursday that Israel's response could include a strike on Iran's

oil facilities.

Italy's 10-year yield rose 5 bps to 3.53% while

the gap between Italian and German yields

tightened to 130 bps.