(Updates at 1120 GMT)

By Alun John and Stefano Rebaudo

July 29 (Reuters) -

Germany's 10-year yield dropped on Monday, the start of a

week packed with crucial economic events, including euro area

inflation data, and policy meetings at the Federal Reserve, the

Bank of England and the Bank of Japan.

Germany's 10-year government bond yield, the

euro area's benchmark, dropped 5 basis points (bps) to 2.35%,

its lowest in six weeks. A break past mid-June's 2.34% would

take it to its lowest since April.

Germany's two-year bond yield, already at

five- month lows, was down a further 2 bps at 2.64%.

Yields move inversely to prices.

"When you look at the behaviour of bond markets in the

past week we've seen a pretty strong rally that seems to be

extending into today's session as well," said Peter Schaffrik,

chief European macro strategist, RBC Capital Markets.

He said that rally appeared to be being driven by a

reduction in breakeven inflation rates and some fears that

economic data would turn sour - "we've seen that in the

PMIs in Europe

to some degree last week, while the labour market in the

U.S. is the pivotal thing on which everything hinges."

That always important U.S. nonfarm payrolls data is due

Friday.

But there is plenty for markets to digest before then

including European inflation data, which, if there is a surprise

could shape expectations for European Central Bank policy.

Money markets are currently fully pricing in two further

25-bp rate cuts and show a small chance of an additional move by

year-end, in line with levels seen late Friday.

Then there are the three central bank meetings. The Fed

is expected to keep rates on hold on Wednesday, with the focus

on how firmly they tee up a September cut, The BOJ could raise

rates slightly while market pricing sees it as roughly 50:50

whether the BoE starts its rate-cutting cycle.

"That means the market is probably going to be surprised

either way," said Schaffrik.

Yields were lower on Monday across Europe, and Italy's

10-year yield was down seven bps at

3.69%.

The yield gap between Italian and German 10-year bonds

- a gauge of the risk premium investors demand to

hold Italian debt - was two bps narrower at 133 bps.

The spread between French and German government bond yields

, closely watched since it widened sharply in the

run up to June's election, was at 69 bps, not far from its

highest level after the French vote of around 72 bps.

(Editing by Bernadette Baum and Chizu Nomiyama)