June 25 (Reuters) - Euro area government bond yields

dropped on Wednesday as markets priced in expectations that the

Iran-Israel ceasefire would hold, while shifting their focus to

macroeconomic data and the fiscal plans of euro area countries.

German cabinet's approved a draft budget with record

investments on Tuesday.

Meanwhile, NATO leaders gathered in The Hague with European

allies hoping a pledge to hike defence spending will dispel U.S.

President Donald Trump's doubts about his commitment to the

alliance.

German 10-year government bond yields, which

serve as the benchmark for the wider euro zone, fell 2 basis

points (bps) to 2.52%.

Yields on 30-year German bonds were down 1.5 bps

after climbing 5 bps on Tuesday.

Analysts expect rising bond supply across the euro area due

to more fiscal spending to drive long-term yield higher.

Spanish Economy Minister Carlos Cuerpo said his country does

not expect any repercussions from its refusal to meet the

defence spending target of 5% of gross domestic product.

"In terms of economic effects what matters is not only the

scale of European spending, but also the extent to which

dependence on U.S. procurement is reduced," said Paul Donovan,

chief economist at UBS Global Wealth Management, referring to

the NATO summit.

Closely watched oil prices held near multi-week lows on the

prospect that crude flows would not be disrupted, after a

ceasefire between Iran and Israel.

"Financial markets have priced in an Iran-Israel ceasefire

holding," UBS GWM's Donovan argued. "That skews the risks if

there is any further military activity."

Analysts argued that a spike in energy prices could have

disrupted the current narrative of disinflationary pressures in

the euro area and the U.S., leading markets to scale back their

bets on central bank rate cuts.

Money markets priced in a European Central Bank deposit

facility rate at 1.75% in December, levels

seen before the Israeli attack against Iran on June 13, after a

rise up to 1.80% on Monday.

A key market gauge of euro area long-term inflation

expectations was at 2.12% on Tuesday from around

2.08% on June 12.

Italy's 10-year yields dropped 2 bps to 3.46%. The Italian

yield gap versus Bunds - a market gauge of the

risk premium investors demand to hold Italian debt - was at 95

bps, after tightening 5 bps the previous day.