(Updates in late European trading)

LONDON, Feb 3 (Reuters) - Euro zone bond yields fell

sharply on Monday after U.S. President Donald Trump announced

tariffs on Canada, Mexico and China and threatened more on

Europe, pushing investors towards the safety of bonds on fears

of a widespread trade war.

Yields retraced some of their drop later in the European

session, however, when Mexican President Claudia Sheinbaum and

Trump announced tariffs on Mexico would be paused for a month.

Germany's 10-year yield fell as much as 10 basis

points to 2.359%, its lowest since Jan. 3, but last traded six

bps lower at 2.398%. Yields move inversely to prices.

"On tariffs, the market is reading this as disinflationary.

It sees this as a hit to economic growth in Canada and Europe,"

said Kenneth Broux, head of corporate research, FX and rates at

Societe Generale.

On Sunday, Trump indicated the European Union would be next

to face U.S. tariffs, but did not say when.

"He has said Europe would not escape tariffs, we are waiting

for that," said Broux, who added the market moves reflected "a

flight to quality and favourable inflation data cement(ing) the

case for ECB rate cuts".

Markets breathed relief after Sheinbaum's and Trump's

comments, with stocks recovering some lost ground and the

Mexican peso and Canadian dollar rebounding sharply.

Market watchers were also digesting the latest euro zone

inflation print, which showed prices accelerating slightly last

month, but remaining on an anticipated course that could allow

the ECB to cut rates further, possibly as soon as March.

It confirms soft inflation prints out of France and Germany

on Friday.

The ECB cut borrowing costs for the fourth straight meeting

last Thursday.

Traders on Monday were pricing in about 90 bps of further

ECB interest rate cuts this year - taking rates to roughly 1.85%

- compared to 80 bps of easing priced on Friday.

Germany's two-year bond yield was last down six

bps at 2.055%, after falling to 2.01% earlier in the session,

the lowest since Dec. 20.

Italy's 10-year yield was five bps lower at

3.512%, while France's 10-year yield was eight bps

lower at 3.126%.

French Prime Minister Francois Bayrou said on Monday he was

using special constitutional powers to pass the 2025 budget

bill, a move likely to trigger a no-confidence vote that will

decide whether his minority government survives.

The euro was last down 0.5% at $1.0311, after

earlier dropping as low as $1.0125.