(Updates with morning trading)

LONDON, July 22 (Reuters) - Euro zone bond prices were

on Tuesday holding onto gains from the day before, when a rally,

exacerbated by thin liquidity, sent German 10-year yields down

by their most in four months.

Germany's 10-year yield, the euro zone benchmark, was last

flat at 2.61% after dropping 7 basis points on Monday, its

biggest daily fall since April.

The yield on Germany's previously under pressure 30-year

bond fell 8 bps on Monday and was last at 3.15%, again steady on

the day.

Market participants were left somewhat bemused by Monday's

moves. Rabobank analysts said in a note it was "as dramatic as

it is hard to rationalise".

ING flagged the move in the 30-year yield as being

"difficult to justify from the newsflow alone", and said that

thin liquidity in the summer could amplify moves.

There was also possibly some profit-taking by those with

short positions in the mix, after Germany's 10-year yield

reached a near four-month high of 2.727% last week.

Traders are also trying to position ahead of the August 1

deadline for the EU to secure a trade deal with the U.S. or face

steep tariffs, though U.S. Treasury Secretary Scott Bessent said

on Monday the Trump administration is more concerned with the

quality of trade agreements than their timing.

It may become slightly easier to explain market moves on

Thursday, when both business activity data is due and a meeting

is scheduled of the European Central Bank.

Economists expect the ECB to leave rates unchanged though

the central bank's messaging will be closely watched as market

pricing currently expects one further 25 basis point rate cut

this year, potentially in September.

Germany's rate-sensitive two-year yield was flat at 1.81%.

It dropped just 4 bps on Monday, meaning the German

yield curve "bull flattened" in market parlance - with longer-

dated yields falling more than short-dated.

That followed four weeks of steepening, when investors

focused on Germany's plans to increase government spending and

the likely impact on long-term borrowing costs.

Moves elsewhere were largely in line with the benchmark.

France's 10-year yield was last flat at 3.30%

after falling nearly 10 bps on Monday, its most since January,

and Italy's 10-year yield was at 3.49%, also

unchanged after a 9 bp decline the previous day.

That left the gap between German and Italian yields at 87

bps, continuing its steady narrowing trend.