Nov 29 (Reuters) - Euro zone long-dated government bond

yields were on track for their fourth straight weekly fall on

Friday as economic data showed a bleak outlook while a market

gauge of inflation expectations dropped below 2%.

Inflation data from France and the euro zone came in line

with expectations, but was higher than expected in Italy.

Data on Thursday showed German annual inflation was flat in

November despite expectations of a second consecutive increase.

The risk premium on French debt steadied as the government

said it was ready to make concessions over the next budget amid

growing concerns that opposition to the bill could topple Prime

Minister Michel Barnier's administration.

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

euro area, was down 1 basis point (bp) at 2.12% and down 13.5

bps for the week.

Data recently showed that euro zone business activity took a

surprisingly sharp turn for the worse this month while German

business morale fell more than expected.

Markets have priced in a European Central Bank deposit

facility rate of around 1.85% in July. They

are fully discounting a 25 bp rate cut at the ECB's December

meeting and have reduced the chance of a 50 bp move to around

20% from over 50% soon after PMI data was released last week.

ECB board member Isabel Schnabel said on Wednesday that the

central bank should cut interest rates only gradually, while

Francois Villeroy de Galhau said on Thursday that the ECB should

keep its options open for a bigger rate cut next month.

Germany's 2-year government bond yields - more

sensitive to ECB policy expectations - rose 0.5 bps to 2.05% and

were on track to end the week almost flat.

A key market gauge of long-term inflation expectations for

the euro area was at 1.99%.

The gap between French and German yields - a

gauge of the premium investors demand to hold France's debt -

rose to 81.5 bps. It hit 90 bps earlier this week, its widest

level since 2012.

On Thursday, Prime Minister Barnier dropped plans to raise

electricity taxes in his 2025 budget, bowing to far-right

threats. However, the National Rally (RN) warned the concession

was insufficient to avoid a no-confidence vote as early as next

week.

The possible collapse of the government casts further doubt

on the country's ability to curb an increasing public deficit.

Barclays said that such a scenario would likely push the

French/German yield spread above 100 bps, while driving French

bond yields much closer to their Italian equivalents.

Italy's 10-year yields - the benchmark for the euro area

periphery - dropped 2.5 bps to 3.32% and were down 18 bps on the

week. The yield spread over Germany's Bunds was at 120 bps.

S&P will review its rating on France's debt later on Friday.

"We have argued before that following the downgrade to

AA-/stable on 31 May, a further downgrade seems unlikely at this

stage, while a negative outlook is possible," said Christoph

Rieger, head of rates and credit research at Commerzbank.