Sept 5 (Reuters) - Euro zone government bond yields

lagged behind U.S. Treasuries, which dropped sharply after data

releases on Friday, sending the spread between German and U.S.

borrowing costs to its lowest level since early April.

U.S. job growth weakened in August while the unemployment

rate increased, confirming that labour market conditions were

softening, boosting bets on Federal Reserve rate cuts.

Stronger economic prospects and expectations of "higher for

longer" policy rates slowed the decline in euro area yields.

Money markets priced in 70 basis points of Fed monetary

easing by December, implying two 25 bps cuts and an 80% chance

of a third move, from 60 bps before economic figures.

They also indicated a 25 bps rate cut in September, along

with a 10% chance of a 50 bps move - up from zero before the

data release.

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

the euro zone bloc, fell five bps to 2.67%. It hit 2.80% on

Tuesday, its highest level since March 26.

The benchmark 10-year U.S. Treasury yield

dropped 10 bps to 4.08%, narrowing the yield gap between U.S.

and German borrowing costs to 141 bps, its lowest since April 7,

when a sharp selloff in U.S. assets started.

Ultra-long euro zone borrowing costs dropped late this week

ahead of U.S. data, after hitting multi-year highs.

Expectations of rising debt levels have strengthened the

case for a higher risk premium on longer-dated bonds.

Yields on 30-year German bonds fell four bps to

3.30%. They reached 4.434% on Wednesday, their highest level

since summer 2011.

Germany's 2-year yields, more sensitive to

expectations for European Central Bank policy rates, fell three

bps to 1.93%.