(Updates with US data details; refreshes prices at 1500 GMT)

By Stefano Rebaudo

June 18 (Reuters) - Euro zone government bond yields

edged lower on Tuesday as concern over political risk in France

subsided somewhat, while a weak read of U.S. consumer spending

helped drive some investment flows into fixed income.

The risk premium that investors demand to hold French

government bonds dropped from its recent highs as markets hope

that France's National Rally will backtrack on fiscally

expensive pledges should it win upcoming parliamentary

elections.

German 10-year bond yield, the benchmark for the

euro area, was flat at 2.403%, having risen earlier by as much

as 2.5 basis points (bps) to 2.437%.

Data that showed U.S. retail sales barely rose in May fed a

bid for Treasuries, which in turn led to a pickup in euro zone

bond prices, pushing yields off the day's highs.

The recovery in German investor morale tapered off in June,

the ZEW economic research institute said.

Markets are currently pricing in another European Central

Bank (ECB) rate cut and a roughly 50% chance of a third move in

2024.

Analysts have mixed views about a further rise in the French

risk premium, but they expect uncertainty to remain high until

the second round of the elections on July 7.

Investors could be cautious about selling French bonds more

aggressively as the ECB could use the Transmission Protection

Instrument (TPI), which allows it to buy unlimited amounts of

bonds to avoid unwarranted and disorderly yield spread widening,

which could hamper the transmission of the monetary policy.

The ECB's chief economist, Philip Lane, said on Monday there

was no need to come to France's rescue now because recent market

turmoil fuelled by political uncertainty was "not disorderly".

ECB President Christine Lagarde said that the ECB would

monitor markets because price and financial stability are

closely linked.

The gap between French and German 10-year yields

- a gauge of the risk premium on French government

bonds - tightened 3.1 bps to 71.1 bps. It hit 82.34 bps on

Friday, its highest since February 2017.

Friday's rush into safe-haven assets made clear that

investors weren't keen to go into the weekend with too much risk

on their books, but the mood changed since Monday.

The leader of the far-right National Rally, Marine Le Pen,

said during the weekend she was seeking cohabitation with

President Emmanuel Macron.

"This (the Le Pen remarks) would increase the prospects that

the current market rout will be resolved more like the BTP fears

after (Giorgia) Meloni took office than the UK gilt crisis in

the wake of Liz Truss," said Christoph Rieger, head of rate and

credit strategy at Commerzbank.

The Italian government debt risk premium dropped after Prime

Minister Meloni took office as she assured Italy would abide by

European fiscal rules.

Italy's 10-year yield was last down 6.2 bps at

3.882%, leaving the Italian-German spread down 4.4

bps at 147.3 bps.