(Updates at 1445 GMT)

By Harry Robertson and Amanda Cooper

LONDON, July 8 (Reuters) - French government bond yields

fell to their lowest level in two weeks on Monday, after

Sunday's election resulted in a hung parliament with a

surprisingly strong showing by the left, allaying fears of a far

right victory.

French yields traded at their lowest premium to German debt

in almost a month before reversing some of the fall. The

so-called spread hit its highest since the euro zone crisis in

2012 in late June as investors worried about a possible jump in

government spending under a potential far right prime minister.

The yield on France's benchmark 10-year bond

fell to its lowest since June 26 at 3.166% and was last down 4

basis points (bps) at 3.174%. Yields fall as prices rise.

German 10-year debt was down 1 bp at 2.517%,

leaving the gap with French yields - which reflects the premium

investors demand to hold French debt rather than Bunds - 2 bps

narrower at 66 bps.

That spread briefly hit a session low of 63.7 bps, the

smallest since June 13.

Jussi Hiljanen, head of rates strategy at lender SEB, said

yields had been trending lower in recent days on the back of

weak U.S. economic data, which has bolstered hopes that the

Federal Reserve will cut interest rates this year.

Given the size and importance of the U.S. economy and

dollar, Fed decisions reverberate through global financial

markets.

The leftist New Popular Front emerged as the dominant force

in the National Assembly after Sunday's election. Yet no single

grouping secured a majority, triggering tricky negotiations that

could result in an unwieldy coalition or a minority government.

President Emmanuel Macron's alliance came in second place,

with the far right National Rally ending third after leading in

the polls for weeks.

"The left wing alliance is not seen as business friendly and

should command less faith in prudent budget management," said

Peter Schaffrik, global macro strategist at RBC Capital Markets.

"However, the lack of a clear majority in the Assembly

should blunt any spending plans for the time being and act as a

cushion for spread widening."

Elsewhere, Italian 10-year yields fell 5 bp​s to

3.891%. That left the Italian-German yield gap 3

bps narrower at 137 bps, around its lowest in a month.

Bond markets awaited U.S. consumer price index inflation

data on Thursday, which will influence the U.S. Federal

Reserve's upcoming interest rate decisions.

Investors will also be listening closely when Fed chair

Jerome Powell testifies before Congress on Tuesday.