(Updates at 1028 GMT)

By Samuel Indyk

LONDON, Oct 3 (Reuters) - Euro zone government bond

yields inched away from multi-month lows on Thursday, as markets

weighed expectations for European Central Bank interest rate

cuts and the escalating conflict in the Middle East.

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

euro zone, was last up 4 basis points (bps) at 2.144%.

It fell to its lowest level since Jan. 4 on Tuesday at

2.011%, before rebounding on Wednesday as traders gauged how the

escalating conflict in the Middle East could affect the

inflation outlook. Bond yields move inversely to prices.

A risk-off tone in financial markets helped drive German

yields lower earlier this week, as investors put more emphasis

on the relative safety of German bunds, yet the move has been

reversed over the last two days.

"When I think of the market reaction, first you see a

risk-off move which sees bonds rally, but from a longer term

perspective it's also inflationary," said Mohit Kumar, chief

economist Europe at Jefferies.

"It's not obvious to me that we should get a big rally in

longer-dated bonds because oil prices and breakevens should move

higher."

Oil prices have climbed since Tuesday on worries

that the prospect of a widening Middle East conflict could

disrupt crude oil production and exports from the region.

Meanwhile, weak growth indicators in the euro area and

inflation falling below the ECB's 2% target have also helped to

push yields lower recently, and prompted major Wall Street banks

to bring forward easing expectations, with most now expecting

the ECB to lower borrowing costs in October.

Market pricing reflects around a 95% chance of a 25 basis

point (bp) rate cut this month, following quarter-point

reductions at the June and September policy meetings.

"ECB speakers have confirmed the market pricing," said Mohit

Kumar, chief economist Europe at Jefferies, referring to

speeches from President Christine Lagarde and usually hawkish

policymakers Ollie Rehn and Isabel Schnabel.

Germany's two-year yield was up 2 bps at 2.069%.

Italy's 10-year yield was up 4.5 bps at 3.484%,

after hitting its lowest since August 2022 on Tuesday at 3.338%.

The spread between Italian and German 10-year yields

was steady at 133 bps.

France's 10-year yield was up 5.5 bps to 2.93%,

as markets absorbed 12 billion euros of long-dated bond supply,

which analysts were closely watching after France's new

government announced tax rises and spending cuts to lower the

deficit this week.

The spread between French and German 10-year yields

widened slightly to 79 bps.