LONDON, April 26 (Reuters) - Euro zone bond yields

dropped on Friday ahead of ever-important U.S. inflation data,

but were still set for a second week of increases in a row as

traders continued to grapple with when, and how, quickly global

central banks will start cutting rates.

German 10-year bond yield, the benchmark for the

euro zone bloc, fell 1.9 basis points to 2.61%, but is set for a

weekly rise of 10 bps.

The euro zone benchmark touched a five-month high of 2.32%

early in the session.

The latest reading of U.S. core personal consumption

expenditures, the Federal Reserve's preferred inflation measure,

is due at 1230 GMT, and could cause markets to further push back

their bets on when the U.S. central bank will start cutting

interest rates.

That will have knock-on effects for other policy makers

including the European Central Bank, and rate markets around the

world.

Italy's 10-year yield was lower by 4.3 bps at

3.94%, and the gap between Italian and German Bunds

narrowed 2.2 basis points to 132 bps.

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

sensitive to European Central Bank rate expectations, was

little changed at 3%.