June 24 (Reuters) - Euro zone government bond yields

were mixed on Monday after the Ifo German business survey showed

that business morale unexpectedly fell in June, supporting

expectations for interest rate cuts.

The Ifo Institute said its business climate index declined

to 88.6 in June from 89.3 in May, compared with analysts'

reading of 89.7 forecast in a Reuters poll.

German 10-year bond yield, the benchmark for the

euro area, rose 0.5 basis points (bps) to 2.41%.

"The Ifo business climate indicator has been overstating the

weakness in the economy for some time," said Jack Allen

Reynolds, deputy chief euro zone economist at Capital Economics.

"The purchase manager index has been a better guide

recently, and while it also declined in June, it still points to

a small increase in gross domestic product (GDP) in the second

quarter," he added.

Euro zone business growth slowed sharply this month as

demand fell for the first time since February, a survey showed

on Friday.

On top of that, hopes for monetary easing in Europe

strengthened after the Swiss National Bank marginally surprised

markets by cutting rates, and the Bank of England delivered a

dovish message.

Money markets priced in around 70 bps of European Central

Bank rate cuts in 2024 late on Friday and

early on Monday, implying a 25 bps cut and a 60% chance of a

third cut by year-end. They last discounted around 65 bps.

Italy's 10-year yield fell 3 bps to 3.91%, while

the Italian-German yield gap dropped to 149 bps.

The risk premium over the euro area's most indebted

countries tends to decline when hopes for rate cuts strengthen.

The French government bond yield gap versus Germany remained

within striking distance of its 7-year high as investors worry

that a far-right victory could lead the government to increase

public spending, fuelling fears of a budgetary crisis at the

heart of Europe.

The financial point man for Marine Le Pen's National

Rally(NR) told Reuters that an RN-led government would end the

decades-long practice of running high budget deficits and stick

to the European Union's fiscal rules.

"We believe it's too soon to buy French spreads ahead of the

first round of elections, given uncertainty about the shape of a

new government and its fiscal policies," said Reinout De Bock,

head of European rate strategy at UBS.

"The absorption capacity of French bonds is substantial, but

the key question is how a new government will halt the upward

trend in debt to GDP," he added.

The gap between French and German 10-year yields

- a gauge of risk premium investors demand to hold

French government bonds - was at 71 bps. It recently hit around

80 bps, its highest level since February 2017.

The first round of French elections will take place on

Sunday.

Market sentiment towards France and the euro area's most

indebted countries improved on Thursday as the market got

through a French bond auction largely unscathed.

(Reporting by Stefano Rebaudo, editing by Emelia

Sithole-Matarise)