March 27 (Reuters) - Euro zone government bond yields

dropped as investors await inflation data on both sides of the

Atlantic, which might provide fresh clues about the central

banks' policy path.

Analysts said the figures were unlikely to change

expectations for the first European Central Bank (ECB) rate cut,

which markets expect in June, but could affect bets on the

following moves.

Spain's inflation rose 3.2% in the 12 months through March,

just below the 3.3% expected by analysts polled by Reuters.

"We think it (Spain's inflation) is likely to increase

further over the coming months due to base effects in energy

inflation, higher VAT rates on energy and foods, and services

firms hiking prices," said Adrian Prettejohn, Europe Economist

at Capital Economics.

"Meanwhile, the tightness of the labour market suggests that

inflation could stay above 2% over the next couple of years."

Investors await further clues about the consumer price

dynamics in the next few days as France, Italy, and the U.S.

will issue data on Friday, while German and euro area-wide

figures are due next week.

Germany's 10-year bond (Bund) yield, the

benchmark for the bloc, was last down 3 basis points (bps) at

2.32%.

Leading German economic institutes said on Wednesday that

they expected the country's economy to grow by 0.1% in 2024,

slashing their prior forecast of 1.3%.

"While (inflation) figures are unlikely to deter the ECB

from cutting rates in June, the market's view for around 90bp

rate cuts this year may ultimately prove somewhat too

optimistic," said Rainer Guntermann, strategist at Commerzbank.

ECB euro short-term rate (ESTR) forwards fully price in an

ECB rate cut by June and 92 bps by December

2024.

France's 10-year government bond yields dropped

2.5 bps to 2.8%, with the gap with the safe-haven Bund

briefly hitting a fresh 4-week high at 50 bps. It

was at around 43 bps last week.

France's public sector budget deficit widened last year by

more than the government planned, data showed on Tuesday.

Analysts said France's spread volatility was limited on

Tuesday as some of the official figures had already been leaked

and flagged that markets have turned a blind eye to excessive

deficits in the bloc.

"Many eurozone countries continue to face fiscal pressure,

and upcoming elections pose political uncertainties," said ING

rate strategists led by Padhraic Garvey.

"We therefore shouldn't entirely bank on the idea that

(yield) spreads will have a smooth ride throughout the upcoming

rate-cutting cycle."

Italy's 10-year yield fell 2.5 bps to 3.63%.

The spread between Italian and German yields - a gauge of

risk premium investors ask to hold government bonds of the euro

area's most indebted countries - was at 129 bps.

It hit 115.40 bps, the lowest in more than 24 months in

mid-March.