(Updates in early afternoon trading in Europe)

LONDON, Feb 21 (Reuters) - Euro zone bond yields fell on

Friday after French survey data pointed to a worse-than-expected

outlook for the economy, potentially bolstering the case for

deeper interest rate cuts by the European Central Bank.

Yields were nonetheless on track for their biggest weekly

rise since early January as investors price in the likely need

for more borrowing to fund higher defence spending.

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

the euro zone bloc, fell 4 basis points (bps) to 2.489%. Yields

move inversely to prices.

Yields across the bloc fell after data showed the French

purchasing managers' index (PMI) - a gauge of private sector

activity - fell by much more than expected in February.

PMI data for the whole euro zone showed the bloc saw very

tepid growth this month.

"That's not great, but there's at least no sign of activity

deteriorating further," said Bert Colijn, an economist at ING.

"The weakness was concentrated in France as Germany and the

rest of the euro zone showed expanding output."

Italy's 10-year yield was lower by 4 bps at

3.57%, while France's was down 3 bps at 3.236%.

The gap between Italian and German yields stood at 108 bps

while the French-German spread was at 70 bps,

after falling to its lowest since July at 66 bps earlier this

week.

Benchmark German yields have risen around 7 bps this week

after U.S. President Donald Trump shocked allies by initiating

talks with Russia over ending the Ukraine war.

Figures in his administration have said Europe will have to

shoulder more of the security burden.

That implies higher spending on defence and so higher

borrowing via bond markets, adding to upward pressure on yields.

Investors on Sunday will be watching Germany's election,

which could result in a conservative-led government that will

potentially spend more to boost the economy, or a heavily split

vote that leads to drawn-out coalition negotiations and

political deadlock.

Germany's two-year bond yield, which is more

sensitive to ECB rate expectations, was last down 4 bps at

2.115%.

Traders on pricing were pricing in roughly 77 bps of further

ECB rate cuts on Friday, up from about 74 bps on Thursday

.