(Adds comments from ECB's Panetta, analyst quote on France)

By Sophie Kiderlin

LONDON, July 7 (Reuters) - Euro zone bond yields nudged

higher on Tuesday as investors weighed the longer-term outlook

for borrowing, with potential French political risk and German

budget and fiscal policy in focus.

Germany's 10-year yield, the benchmark for the euro

zone, was last up by around 2.2 basis points to 2.966%, having

earlier reached its highest since June 19.

That marked its seventh straight session of gains, after it

advanced last week on rising U.S. and Japanese bond yields and

owing to investor attention moving to any potential shifts in

the borrowing landscape.

Yields had previously been pulling back following the

interim U.S.-Iran deal, which sent oil prices lower and eased

worries about the war's impact on inflation, growth and central

bank interest rates.

However, European Central Bank Governing Council member and Bank

of Italy Governor Fabio Panetta on Tuesday said that the outlook

for the euro zone economy remains fragile.

ECB board member Isabel Schnabel said on Monday that the

euro zone's economy was not back to its state before the Iran

war despite the drop in oil prices, as core inflation remained

strong and price pressures continued.

Money markets are pricing in one more rate increase from the

central bank this year.

Germany's 2-year yield, which is more sensitive to

interest rate expectations, was last up 2.7 bps to 2.5686%.

FRENCH POLITICS IN FOCUS

Meanwhile, a Paris court will rule on Tuesday on French

far-right leader Marine Le Pen's appeal against an election ban

for misusing European funds.

The ruling will decide whether Le Pen can run for president

in 2027 - with Jordan Bardella otherwise set to become the

National Rally's candidate - as the looming election has renewed

concerns about French political risk.

Tuesday's verdict itself should, however, have only a limited

impact on markets, Francesco Pesole, FX strategist at ING said.

"We suspect OATs and the euro can be seriously unnerved only by

a surge in support for left-wing candidates like Jean-Luc

Mélenchon at this stage," he said.

"We think markets have largely priced in a Le Pen or Bardella

win, and that either would deliver sufficient fiscal prudence to

limit bond volatility."

French 10-year bond yields were last up 1.5 bps to

3.7486%.

Elsewhere, the German cabinet on Monday approved the first draft

of the 2027 budget. It allocates total spending of €555.4

billion ($634.2 billion), with total borrowing amounting to

€203.6 billion, as Germany boosts investment and defence

spending to shield its sluggish economy from war-related energy

shocks and years of underinvestment.