(Updates moves, adds analyst comment, context)

By Linda Pasquini

June 5 (Reuters) - Euro zone bond yields fell on

Thursday after a muted start to the session, with markets

expecting an interest rate cut from the European Central Bank

later in the day.

With the ECB widely expected to cut rates by 25 basis points

to 2%, investors will focus on any indication of what comes

after.

"We assume that the ECB will leave the door open for further

rate cuts, while at the same time emphasising its dependence on

data," analysts at Frankfurt-based Metzler wrote in a note to

clients. "With a slightly dovish overall impression, the euro

yield curve could shift slightly lower."

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

euro area, fell 3 basis points to 2.49%, hovering around its

lowest levels since May 8.

Germany's policy-sensitive two-year yield was

little changed at 1.784%, within its recent tight range.

The ECB has cut rates seven times in 13 months, as inflation

eased from post-pandemic highs, seeking to support a euro zone

economy that was struggling even before U.S. President Donald

Trump's erratic economic and trade policy came into the picture.

The central bank is expected to cut at least one more time

by the end of the year, bringing the deposit facility rate to

1.75%, but markets are factoring in only a 30% chance so far for

that cut to come at the ECB's July meeting.

"Whether the ECB will cut interest rates again in July, as

we are forecasting, will ultimately depend above all on the

development of the U.S. trade war and U.S. negotiations,

especially with the EU," Metzler analysts said.

Markets have been rattled since Trump announced a slate of

tariffs on trading partners around the globe on April 2, only to

pause some and declare new ones, pushing investors to look for

alternatives to U.S. assets.

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

euro area periphery, was down 4.5 bps at 3.455%, its lowest

since February 10, leaving the gap between Italian and German

yields at 93.8 basis points.

Euro zone data on Thursday showed a larger than expected

decline in producer prices in April compared to the previous

month, helped by lower energy prices.