(Updates throughout; adds Fed news in paragraph 3)

By Stefano Rebaudo

Sept 4 (Reuters) - Euro zone government bond yields fell

on Thursday, after a surge earlier this week, as weak U.S. data

and remarks from Federal Reserve officials reinforced bets that

the central bank will cut interest rates in September.

However, investors remained concerned about rising public debt

and increased bond supply in the euro area, with France's

government facing a likely collapse next week over a contested

budget vote, while Germany is ramping up fiscal spending.

Several Fed officials who spoke on Wednesday pointed to rate

cuts ahead, while weak U.S. labour market data has also

bolstered expectations the Fed will cut rates at its September

16-17 meeting.

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

euro zone bloc, dropped 1.5 basis points (bps) to 2.72%.

The 30-year German bond yield fell 1.3 bps to

3.34%. It hit 3.434% on Wednesday, the highest in over 14 years.

Ultra-long-dated euro zone government bonds came under

selling pressure earlier this week, with yields hitting

multi-year highs, as investors grew increasingly concerned about

rising debt levels across the bloc.

Markets expect Germany's investment plans, along with likely

increases in defence spending across euro area countries, to

push up debt.

"Euro area government bonds are probably not out of the

woods as the underlying fiscal challenges and funding

implications still loom large," said Hauke Siemssen, rate

strategist at Commerzbank.

France's 30-year yield was down 4.3 bps at

4.40%. It hit 4.523% on Tuesday, the highest since June 2009.

The yield gap between 10-year French government bonds

and safe-haven German Bunds - a market gauge of

the risk premium investors demand to hold French debt - widened

to 80 bps after reaching 82 bps last week.

French Finance Minister Eric Lombard said the government would

have to compromise on plans to cut the budget deficit if Prime

Minister Francois Bayrou is toppled in a confidence vote on

September 8, the Financial Times reported on Wednesday.

Analysts noted that, despite expectations for a higher risk

premium on ultra-long borrowing costs, demand for longer-dated

bonds remained quite robust.

Italy's Treasury said on Tuesday it raised 5 billion euros

through a new 30-year BTP, after attracting around 107 billion

euros in total orders.

Italy's 30-year yield fell 3.4 bps to 4.58%.