June 4 (Reuters) - Euro zone government bond yields

dropped on Tuesday as weak economic data and falling oil prices

led investors to increase their bets on future European Central

Bank interest rate cuts.

Markets are awaiting U.S. jobs data later in the session

after economic figures showed on Monday that U.S. manufacturing

activity slowed for a second straight month in May, the latest

indications that a gradual economic slowdown is taking hold.

The number of people out of work in Germany rose more than

expected in May, data showed on Tuesday.

"As central bankers wait for more clarity about the

robustness and labour-intensity of the growth rebound, they may

go slowly on the rate cuts," said Christian Schulz, deputy chief

European economist at Citi, referring to German figures.

Oil prices eased as much as 1% on Tuesday, extending losses

from a four-month low in the previous session.

Germany's 10-year yield, the bloc's benchmark,

was down 3.5 basis points (bps) at 2.55%, after dropping 6.5 bps

the day before in its biggest daily fall since May 15.

"With just 35 bps discounted until year-end after this

week's prospective ECB rate cut and falling oil prices reviving

disinflation hopes, the momentum looks set to continue," said

Christoph Rieger, head of rates strategy at Commerzbank.

Investors are taking an ECB rate cut of 25 bps on Thursday

for granted, but are uncertain about the outlook.

Money markets are pricing in about 63 bps of ECB monetary

easing in 2024 - from less than 55 bps

early on Monday - which implies two rate cuts and an around 50%

chance of a third move by year-end.

"Yet it seems markets are strongly driven by U.S. data when

deciding on the number of ECB cuts to expect this year," rate

strategists at ING said, after flagging that the correlation

between U.S. Treasury and Bund yields is increasing again.

The spread between U.S. and German 10-year yields

- a gauge of expectations for monetary policy

divergence between the U.S. Federal Reserve and the ECB - hit a

fresh 2-1/2-month low at 180.01 bps and was last at 183.8 bps, 3

bps wider from the day before.

The gap between French and German 10-year government bond

yields was still around 49 bps after Standard & Poor's cut its

rating on France's sovereign debt late Friday, a move that

market participants had widely expected.

Italy's 10-year yield fell 1.5 bps to 3.88%

after dropping 9 bps, its biggest daily drop since May 15.

"BTPs remain overall resilient though, defying more

fundamental headwinds as the manufacturing PMI kept falling,

taking the difference to Spain to a record high," Commerzbank's

Rieger added.

Manufacturing activity contracted in Italy at the steepest

pace this year, and grew at the fastest pace in more than two

years in Spain.

The yield gap between Italian and German bonds

, a gauge of the risk premium investors seek to

hold Italy's bonds, widened 2 bps to 132 bps.

Germany's 2-year yield, more sensitive to policy

rate expectations, was down 2.5 bps at 3.01%.