Sept 27 (Reuters) - Euro zone government bond yields

dropped on Friday after inflation data from France and Spain led

investors to increase their bets on future European Central Bank

rate cuts.

French consumer prices rose less than anticipated in

September, aided by a decline in energy costs. Spain's European

Union-harmonised 12-month inflation fell to 1.7%, lower than the

1.9% expected by analysts polled by Reuters.

The German and euro area figures are due next week.

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

the euro zone bloc, fell 6 basis points (bps) to 2.11%.

"Slightly lower core inflation in the euro-zone wouldn't

come as a big surprise to the ECB so would be unlikely to

drastically alter policymakers' thinking," said Franziska

Palmas, senior European economist at Capital Economics.

Money markets priced in an 80% chance of an ECB rate cut in

October from around 20% early this week and

60% before data.

However, they are more inclined to discount a bigger move in

December as forwards on the ECB euro short-term rate (ESTR)

fully discounted a 50 bps cut by year-end.

Markets now await the U.S. Personal Consumption Expenditure

(PCE) figures - the Federal Reserve's preferred inflation

measure - later in the session, which could affect expectations

for monetary policy paths on both sides of the Atlantic.

"We expect a (PCE) core 0.2% month-on-month print, in line

with consensus, and limited market impact," said Francesco

Pesole, strategist at ING.

"Even in the case of a small deviation from consensus, the

recent shift in the Fed's focus to the employment side of its

mandate means markets are less sensitive to inflation news."

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

sensitive to ECB rate expectations, hit its lowest level since

December 2022 at 2.065%. It was last down 4 bps at 2.07%.

The gap between French and German 10-year yields

- a gauge of risk premium that investors demand to

hold France's government bonds - was last at 78 bps, from around

70 bps two weeks ago. It reached its widest since 2012 beyond 85

bps during France's parliamentary elections.

Budget Minister Laurent Saint-Martin warned the deficit is

at risk of topping 6% of economic output, far above the 5.1% the

previous government had estimated in the spring.

Italy's 10-year yield fell 6 bps to 3.42% and

the gap between Italian and German yields slightly

tightened to 130 bps.