(Updates prices at 1525 GMT, adds quote)

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 below 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 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 could shape

expectations for European Central Bank policy.

The ECB cut rates in June, and money markets are fully

pricing in two further 25-bp rate cuts, with the first likely in

September. They show a small chance of an additional move by

year-end.

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 markets see around a 50%

chance the Bank of England could start its rate-cutting cycle on

Thursday.

"The BoE meeting could have a spillover effect into the euro

zone," said Michiel Tukker, senior European rates strategist at

ING.

"Markets are not just wondering about whether the ECB cuts

in September but whether that leads to a broader easing cycle.

If the BoE starts cutting now that could be symbolic and bring

markets to appreciate that narrative.

Yields were lower on Monday across Europe. Italy's 10-year

yield was down 5 bps at 3.71%. The yield

gap between Italian and German 10-year bonds - a

gauge of the risk premium investors demand to hold Italian debt

- was little changed at 134 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 71 bps, not far from its

highest level after the French vote of around 72 bps.

(Editing by Bernadette Baum, Chizu Nomiyama and Christina

Fincher)