(Updates after U.S. jobs data)

By Harry Robertson and Stefano Rebaudo

May 3 (Reuters) - Euro zone bond yields fell sharply on

Friday after data showed the U.S. labour market was much weaker

than expected in April, raising hopes for interest rate cuts.

Nonfarm payrolls data showed the U.S. labour market added

175,000 jobs in April, down from 315,000 in March and well below

the 243,000 increase economists expected.

Bond yields fell across the board as investors bet the

numbers would make the Federal Reserve more likely to lower

borrowing costs this year and make other central banks feel more

comfortable in doing the same.

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

the euro zone, was last down 10 basis points (bps) at 2.456%,

having traded at 2.534% just before the figures were released.

Yields move inversely to prices.

Yields were on track to end the week sharply lower after the

Fed held interest rates on Wednesday and Chair Jerome Powell

said another hike was unlikely. He suggested rate cuts remain on

the table, albeit likely later than expected after a run of

strong economic data.

The 10-year U.S. Treasury yield, which sets the

tone for borrowing costs around the world, was last down 10 bps

at 4.469%.

Investors expect the European Central Bank will be able to

cut interest rates more than the Fed this year, given the euro

zone's weaker growth and cooler inflation. However, the power of

the U.S. economy means policymakers could be reticent to stray

too far from the Fed's path.

Italy's 10-year yield was 11 bps lower at

3.759%, from 3.85% before the U.S. data.

The gap between Italian and German 10-year yields

- a gauge of the risk premium investors ask to

hold bonds of the euro area's most indebted countries - was down

2 bps at 129 bps, its lowest level since March.

Market participants will focus on Fitch's review of Italy's

credit rating after the European market closes.

"A negative outlook seems possible today, but we consider it

more likely that the rating agency will wait until more clarity

on the next budget emerges," said Christoph Rieger, head of

rates and credit research at Commerzbank.

He added that the Italian spread recently tightened "defying

fundamental impulses."