(Updates prices at 1554 GMT)

By Linda Pasquini

Sept 26 (Reuters) - The spread between French and German

10-year yields hit its widest in seven weeks on Thursday, as

rising expectations that the European Central Bank could cut

rates in October boosted bond prices overall, but French bonds

lagged amid political jitters.

Germany's 10-year bond yield fell 2.6 basis

points to 2.16% and France's was down 0.9 bps at 2.97%.

The spread between them, showing the greater

returns investors demand for holding French debt over safer

German bonds, hit 82 bps, its widest since Aug. 5, and up from

around 70 bps two weeks ago, before easing a touch.

Investors are monitoring French yields, which on Tuesday

rose above Spain's for the first time since 2008 amid concern

over the administration's ability to tackle the budget deficit.

French Prime Minister Michel Barnier needs to finalise a

2025 budget in days and hand it over to lawmakers by mid-October

at the latest. Budget Minister Laurent Saint-Martin warned the

deficit is at risk of topping 6% of economic output, far above

the 5.1% the previous government had estimated in the spring.

"We expect the government to struggle to pass a budget which

substantially reduces the deficit next year and, as a result, we

think the spread on French over German government bond yields is

likely to continue rising in the coming weeks and months,"

Andrew Kenningham and Hubert de Barochez, economists at Capital

Economics, said in a note.

Driving the fall in euro zone yields were expectations that

the ECB will cut rates at its October meeting.

Market pricing now reflects an about 60% chance of a cut

next month, up sharply from last week, as soft European business

activity survey, a downbeat German business morale report and a

fall in U.S. consumer confidence all suggest the European

economy is weakening and requires monetary easing.

Bond yields fell on Thursday after Reuters reported that

policy doves at the ECB are preparing to fight for an October

cut, a move likely to meet resistance from their more

conservative peers, seven sources told Reuters.

However, previous ECB messaging still suggests the doves

have a tough task.

"I think the bar is quite high for the ECB to cut interest

rates. The message from (ECB President Christine) Lagarde in

September was 'we would rather wait until December'," said Yvan

Mamalet, senior economist and strategist at Kleinwort Hambros.

"So you will need to see a very negative surprise on

inflation or further negative surprises on growth for the ECB to

cut in October. December is definite though."

French inflation data is due Friday, and other national and

bloc wide data follows next week.

Italy's 10-year yield was down 7.2 bps at 3.47%

and the rate sensitive German two-year yield was down 3.1 bps at

2.1%.

Euro zone bond yields however bounced off their day's lows,

helped by rising Treasury yields after data showed U.S. weekly

jobless claims unexpectedly fell, prompting traders to cut bets

that the Federal Reserve cut rates again by 50 bps at its

November meeting.