(Updates at 1015 GMT)

By Sruthi Shankar and Samuel Indyk

LONDON, Aug 6 (Reuters) - Euro zone government bond

yields were mixed on Tuesday after hitting a seven-month low the

day before as firmer U.S. data helped ease worries about an

imminent recession, but concerns about market volatility

remained.

Germany's 10-year yield was last down 2 basis

points (bps) at 2.162%, having touched 2.074% on Monday, its

lowest since Jan. 4, before recovering to end little changed on

the day. Bond yields move inversely to prices.

The recovery in yields gained steam after data showed that

the U.S. services sector rebounded from a four-year low in July,

with a measure of services employment rising for the first time

since January.

That helped ease worries of a recession after Friday's weak

U.S. labour market report sparked growth worries and had markets

betting on more aggressive central bank easing this year.

Markets had moved to price in 130 bps of rate cuts by the

Federal Reserve by year-end, but have trimmed those expectations

to around 112 bps.

It was a similar picture for the European Central Bank,

where markets had priced as much as 90 bps of additional easing

by year-end, or at least three quarter-point cuts.

That now stands at 68 bps, implying two 25 bp moves and

around a 72% chance of a third.

"The fundamental picture hasn't changed that much," said

Sophia Oertmann, government bond analyst at DZ Bank.

"We had the weak employment report and other signs the U.S.

economy is slowing down but that's not justification to suddenly

price in a peak of 130 bps of easing by the Fed this year.

That's clearly too much," Oertmann added.

Fed policymakers on Monday attempted to calm markets,

pushing back on the notion that Friday's weak payrolls report

means the economy is in recessionary freefall.

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

to changes in central bank easing expectations, was last up 1.5

bps at 2.348%. It hit its lowest level since March 2023 on

Monday at 2.151%.

The sharp swings in markets were a combination of heavy

positioning, unwinding of carry trades, summer illiquidity and

geopolitical concerns, according to Jefferies chief Europe

economist Mohit Kumar.

This helped amplify the shift in the market perception of

the U.S. economy, he said.

"Markets are not yet out of the woods, but at least the

indications from Japan this morning look encouraging," said

Christoph Rieger, head of rates and credit research at

Commerzbank.

A more than 12% slide on Monday in Japan's main share index,

the Nikkei 225, was mostly reversed on Tuesday, with the

index rising over 10%.

Japanese leaders on Tuesday tried to assuage concerns about

the sharp swings in financial markets, with senior finance

officials convening an emergency meeting to discuss the

sell-off.

Italy's 10-year yield, the benchmark for the

euro zone periphery, fell 3 bps to 3.647%, pushing the spread

between Italian and Germany 10-year yields to

147.5 bps. On Monday it touched its widest level in more than

five weeks at 153.9 bps.