(Updates at 1320 GMT)

By Harry Robertson

LONDON, May 14 (Reuters) - Germany's 10-year bond yield

touched a near two-week high on Tuesday after data showed U.S.

factory prices rose by more than forecast last month, denting

hopes of a summer rate cut from the Federal Reserve.

The U.S. producer price index (PPI) rose 0.5%

month-over-month in April, the Bureau of Labor Statistics said.

Economists polled by Reuters had expected a 0.3% increase.

However, reaction was contained ahead of consumer price data

on Wednesday which analysts said could provide greater clues on

the path of U.S. interest rates.

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

the euro area rose to 2.553%, its highest since May 2. It was

last at 2.52%, up 1.5 basis points (bps). Yields move inversely

to prices.

Germany's rate-sensitive two-year yield was up

0.5 bps at 2.96%.

"This report underscores Fed concerns that the path of

disinflation has stalled, requiring a higher for longer policy

stance to combat seemingly entrenched inflation," said Quincy

Krosby, chief global strategist for LPL Financial.

Money market traders slightly pared bets that the Fed will

deliver a first rate cut in September, pricing in around a 60%

chance of a September move, versus a 64% chance before the

report.

"We think that most important data this week will be

tomorrow's U.S. CPI report," said Camille de Courcel, head of

G10 rates strategy for Europe at BNP Paribas.

"We think that will be the driver for global rates. And in

particular, we think that even an in-line (with expectations)

print...would likely see yields go to the downside."

Data on Wednesday is expected to show U.S. consumer price

index inflation slowed to 3.4% year-on-year in April, from 3.5%

in March.

The size of the U.S. economy and the importance of the

dollar mean global markets - including in euro zone bonds -

shift along with expectations of Federal Reserve policy.

Central bankers in Europe have cautioned that they do not

want to stray too far from the Fed's rate path given that it

could hurt their currencies.

Italy's 10-year yield was 2.5 bps higher at

3.88%, and the gap between Italian and German bond yields

widened 1 bp to 135 bps.

Yields have risen this year as U.S. economic data has come

in stronger than expected, causing investors to rein in their

bets on central bank rate cuts.

Survey data released on Tuesday by the German ZEW institute

showed business morale in the country hit a two-year high in

May, a further sign that the euro zone economy is recovering

from a period of stagnation.

In the United States, President Joe Biden unveiled a

sweeping set of tariff increases on Chinese products on Tuesday

as he tries to appeal to voters in U.S. industrial heartlands.

The spread between U.S. 10-year Treasury and German bond

yields narrowed 3 bps to 194 bps.