Oct 4 (Reuters) - Euro area government bond yields edged

up on Friday ahead of key U.S. economic data that could affect

expectations for the interest rate outlook on both sides of the

Atlantic.

German yields fell early this week after weak economic

figures, but they bounced back after they dropped to around 2%.

Investors became more cautious and shifted their focus to

inflation risks due to geopolitical tensions in the Middle East.

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

sensitive to European Central Bank rate expectations, was last

up 2.5 basis points (bps) at 2.10%. It hit 1.987% on Tuesday,

its lowest level since December 2022.

Markets are pricing in an around 95% chance of a 25 bps rate

cut by the ECB in October from 80% last

Friday.

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

the euro zone bloc, was up one bp to 2.14%. It hit 2.011% on

Tuesday, its lowest level since January.

The gap between French and German 10-year yields

- a gauge of risk premium that investors demand to

hold France's government bonds - was last at 79 bps. It reached

its widest since 2012 beyond 85 bps during France's elections

this summer.

The French government plans to subject the budget to a 60

billion euro belt-tightening drive next year to hit new fiscal

targets, officials said on Wednesday, outlining an unprecedented

push to rein in France's spiralling deficit.

Italy's 10-year government bond yield rose 0.5

bps to 3.48%, with the gap between Italian and German yields

at 133 bps.