(Updates with US employment data; refreshes prices)

* Traders cut chances of another ECB rate hike this year to

around 71%

* Lagarde said euro zone inflation, growth risks are now

more broadly balanced

* Two-year German yields hit their lowest level since

mid-April as oil prices retreated

By Amanda Cooper

LONDON, July 2 (Reuters) - Short-dated euro zone government

bond yields drifted lower on Thursday, as investors dialled down

their expectations for the European Central Bank to aggressively

raise interest rates this year.

A softer U.S. employment report for June gave the Treasury

market some support, which in turn filtered into the euro zone

market, where yields edged lower in afternoon trading.

Two-year German Schatz yields, the most sensitive to

shifts in expectations for rates and inflation, have fallen 1.6

basis points this week, having touched their lowest level since

mid-April, as the oil price has retreated. They were last down 1

bp on the day at 2.50%.

ECB President Christine Lagarde said on Wednesday the risks

to euro zone inflation and economic growth were now more broadly

balanced than a few weeks ago, given the recent fall in oil

prices, which prompted traders to cut the chances of one more

rate hike this year to around 71%, from closer to 100% a week

ago.

The ECB, in its last policy decision, said risks to growth

were skewed to the downside, while inflation risks were skewed

to the upside.

Benchmark 10-year Bund yields were up for a fourth

day in a row, trading 3 bps higher at 2.956%.

"Our read of Lagarde's comments is that the ECB would remain

on hold if oil prices remain around current levels," Jefferies

strategist Mohit Kumar said.

WARSH STICKING TO FED INFLATION TARGET

The euro zone market offered little reaction to data on

Thursday that showed U.S. job creation was far slower last month

than forecast. The monthly employment report showed just 57,000

workers were added to payrolls in June, compared with

expectations for an increase of 110,000.

Money markets showed traders continue to price in at least one

rate hike from the Federal Reserve this year.

"With the new Fed chair having placed the focus squarely on

inflation, June payrolls are unlikely to shift interest rate

expectations on their own," said Julien Lafargue, chief market

strategist at Barclays Private Bank and Wealth Management.

"The data may also be distorted as hiring linked to the FIFA

World Cup may have temporarily boosted employment in sectors

such as leisure and hospitality during the survey period. As a

result, markets are likely to place greater weight on the June

CPI (Consumer Price Index) report due on 14 July, as inflation

data will offer a cleaner read on the economy," he said.

Fed Chairman Kevin Warsh said on Wednesday he would stick firmly

to the U.S. central bank's 2% inflation target and "disappoint"

anyone who expected loose monetary policy, despite President

Donald Trump's call for interest rate cuts.

Since Warsh took over as Fed chief on May 22, U.S. Treasuries

have noticeably underperformed other major bond markets, as

investors rushed to factor in the possibility of rate hikes this

year.

Two-year Treasury yields have barely moved in that

time, compared with a drop of nearly 14 bps in German 2-year

yields, which have benefited from investors lowering

their expectations for the ECB to deliver more than one rate

hike this year.

The premium of 2-year Treasury yields over 2-year German

is now around 163 bps, close to its highest since

last September, reflecting the rising chances of Fed hikes

versus the falling chances of many more from the ECB.

(Editing by Alex Richardson and Paul Simao)