(Updates with quote and details at 1345 GMT)

By Samuel Indyk and Alun John

LONDON, May 15 (Reuters) - Euro zone bond yields dropped

on Wednesday after U.S. consumer prices increased by less than

expected in April, boosting expectations that the Federal

Reserve will cut interest rates two times this year, and making

larger ECB cuts easier too.

Germany's 10-year yield, the benchmark for

the euro zone bloc, was last down 10 basis points at 2.44%,

extending a decline ahead of the data, and putting it on track

for its biggest daily drop since April 12.

The U.S. consumer price index rose 0.3% last month after

advancing 0.4% in March and February, the Labor Department's

Bureau of Labor Statistics (BLS) said on Wednesday. Economists

polled by Reuters had forecast the CPI gaining 0.4%.

Euro zone yields are highly responsive to U.S. data given

investor expectations that policy makers at the European Central

Bank will not wish to cut rates substantially while the U.S.

Federal Reserve remains on hold, and the global nature of some

aspects of inflation.

An ECB rate cut in June is seen as highly likely - there

have been repeated remarks from rate setters to this effect -

but its path beyond that remains uncertain.

Markets slightly increased expectations of the scale of ECB

cuts this year after the U.S. data and are close to pricing in

three 25 basis point cuts in 2024.

Investors increased their bets on Fed rate cuts after the

inflation data and now fully price two rate cuts this year,

likely beginning in September.

"What the data does for the Fed is it establishes the first

in what they are going to need to be a series of softer CPI

reports for them to be able to cut later this year," said Jason

Pride, chief of investment strategy and research at Glenmede.

"What it doesn't do is put the Fed on a trajectory to

begin cutting immediately. They're going to need a couple more

reports to get some confidence."

The 10 year U.S. Treasury yield was last down 7 bps at

4.37%, its lowest in a month. The gap between the

yields on the 10 year U.S. treasury and the 10 year German bund

was last 193 basis points having narrowed after heading above

220 bps in late April when U.S. rate cuts seemed further away.

Italy's 10-year yield was lower by 15 bps at

3.75%.