April 12 (Reuters) - Euro zone government bond yields

dropped sharply on Friday as markets increased bets on future

European Central Bank rate cuts and fears of a broadening of the

Middle East conflict triggered some bids for safe-haven assets.

The ECB said on Thursday it might cut rates soon but failed

to trigger a repricing of market bets on future rate cuts after

strong U.S. economic data led investors to reduce expectations

for future monetary easing there.

Gold surged to a fresh peak on Friday, supported by

safe-haven demand amid ongoing tensions in the Middle East.

Analysts said investors are closing short positions on euro

area government bonds opened after two weeks of strong U.S. data

and hawkish remarks from Federal Reserve officials, with fears

of a confrontation between Iran and Israel and the U.S. weighing

on market sentiment.

"We do see geopolitical risks impacting markets a bit more

than usual with investors watching closely developments on

Israel and Iran," said Joost van Leenders, senior investment

strategist at Van Lanschot Kempen.

Israeli Defence Minister Yoav Gallant said on Thursday that

Israel would respond directly to any attack by Iran. The

Pentagon said it discussed with Gallant the United States'

"iron-clad" commitment to Israel's security against threats from

Iran and its proxies.

Evelyne Gomez-Liechti, rates strategist at Mizuho Bank said

markets were in a "consolidation phase."

"The risk of an Iranian attack on Israel during the weekend

will likely help the bid in rates," she argued.

Germany's two-year government bond yield, more

sensitive to the outlook of policy rates, dropped 7 basis points

(bps) to 2.90% and was set to end the week 3 bps higher.

Benchmark 10-year Bund yield fell 9 bps to 2.39%.

Money markets last priced in around 80 bps of monetary

easing in 2024 from 75 late on Thursday and

from 87 bps on Wednesday before the U.S. data. They also

discounted an around 90% chance of a 25-basis-point first move

by June.

The ECB policy meeting was relatively uneventful for the

market as the ECB confirmed it would be data-dependent, with

economists looking for hints about the future policy path.

"We interpret some of the indirect messages on inflation and

financial conditions as being on balance more consistent with

gradual/quarterly cuts than continuous/back-to-back cuts," said

Deutsche Bank chief economist Mark Wall.

"President Lagarde also argued the ECB is independent of the

Fed, but at the same time was clear that U.S. data is taken into

account," he added.

The Italian 10-year bond yield was 11.5 bps

lower at 3.75%. The gap between Italian and German 10-year

borrowing costs - a gauge of risk premium investors ask to hold

bonds for the euro area's most indebted countries - tightened to

135 bps.