(Updates at 1445 GMT)

By Harry Robertson and Samuel Indyk

LONDON, July 3 (Reuters) - Euro zone bond yields dropped

on Wednesday after survey-based data showed a sharp slowdown in

the U.S. services sector in June, bolstering expectations for

interest rate cuts from the Federal Reserve and other central

banks this year.

Germany's 10-year bond yield, the euro area

benchmark, was last down 6 basis points (bps) at 2.549%,

dropping from around its highest in three weeks. Yields move

inversely to prices.

The Institute for Supply Management's gauge of

nonmanufacturing activity dropped to its lowest level since May

2020, with a measure of new orders tumbling. Separate data

showed U.S. weekly jobless claims rose last week in a sign the

Labour market is slowing.

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

tone for borrowing costs around the world, fell 9 bps to 4.343%.

Shorter-dated yields fell less far, a reflection of the fact

that they have risen by less than longer yields - which have

been driven by U.S. and European politics - in recent days.

Germany's 2-year bond yield, which is

sensitive to expectations about European Central Bank (ECB)

interest rates, was last down 1 bp at 2.899%.

Elsewhere, the risk premium investors demand to hold French

debt narrowed on Wednesday as the prospect of National Rally

(RN) securing a majority in France's parliament lessened, as

anti-RN candidates coordinated a series of withdrawals in a bid

to block the far right.

More than 200 candidates from the Left Alliance and

President Emmanuel Macron's party confirmed they would step

aside from Sunday's second-round election, as they called on

voters to select whichever candidate was best placed to defeat

the local RN rival.

"The strategy would significantly limit the chances of Le

Pen winning an outright majority," Jefferies chief Europe

economist Mohit Kumar said in a note, referring to RN leader

Marine Le Pen.

"With both the far right or the far left unable to have the

numbers to implement extreme policies, the scenario should be a

near-term positive for the markets."

France's 10-year bond yield was last down 8 bps

at 3.253%.

The gap between French and German 10-year sovereign bond

yields - a gauge of the premium investors demand

for the extra risk of holding French bonds - tightened to 67.8

bps, its narrowest since June 13. It was last at 71 bps.

The spread hit 85 bps on Friday, its widest since 2012, and

despite falling back after the first round of the French

election, it remains more than 20 bps wider than before Macron

called the election on June 9.