Aug 12 (Reuters) - Euro zone government bond yields

edged higher on Monday after a volatile week of trading on

worries around the U.S. economy as investors awaited U.S.

inflation data to gauge the extent of interest rate cuts by the

Federal Reserve this year.

The German 10-year bond yield, the benchmark for

the euro zone bloc, rose 2.6 basis points to 2.248%.

It had sunk to a seven-month low of 2.074% on last Monday

when worries about slowing U.S. jobs growth, an unravelling of

Japanese yen-funded trades and disappointing earnings among

large tech firms sent investors scurrying to the perceived

safety of bonds.

Euro zone bond yields have steadily rebounded since then,

with better-than-expected U.S. data easing concerns about an

economic downturn and traders paring back bets of rate cuts from

the U.S. central bank this year.

"It was a combination of overreaction but also data has

shifted a little bit but that shouldn't necessarily warrant

moves as big as that," said Rufaro Chiriseri, head of fixed

income for the British Isles at RBC Wealth Management.

Focus shifts to U.S. consumer prices data on Wednesday, with

economists forecasting a slight pick up in inflation in July but

not enough to move the needle on expectations of a rate cut next

month.

Traders are currently pricing in rate cuts of 101 bps by the

end of the year and roughly evenly split on whether the U.S.

central bank will cut rates by 25 bps or 50 bps at its September

17-18 policy meeting.

"What we're seeing at the moment is a lot of investors being

positioned for a sublime inflation outlook and there is that

risk of disappointment. We could see yields rise if we do get a

surprise in the data," said Chiriseri.

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

sensitive to European Central Bank (ECB) rate expectations, rose

2.9 bps at 2.41%.

Money markets show traders are currently pricing in about 66

bps of rate cuts from the ECB by the end of this year, down from

the 72 bps seen last Monday.

The central bank cut rates by 25 bps in June, its first such

move in five years, and traders see a 91% chance of another 25

bps rate cut in September.

Italy's 10-year yield was higher by 1.8 bps at

3.662%, and the gap between Italian and German bunds

narrowed 4 basis points to 140.7 bps.