(Updates at 0845 GMT)

By Alun John

LONDON, Sept 23 (Reuters) - Yields on Germany's 10-year

bond rose above that on its two-year debt on Monday, the first

time this part of the curve has disinverted since November 2022,

as soft business activity data drove expectations of more ECB

rate cuts this year.

The yield on the rate-sensitive German two-year bond dropped

by as much as 10 bps to 2.139%, while the 10-year yield dropped

to as low as 2.143%, 7 bps lower.

Longer-dated bond yields are generally higher than

shorter-dated ones. But when this reverses, or inverts, it is

often seen as a signal of a recession in the next one to two

years.

The curve usually turns positive before a downturn begins,

with short-term yields dropping faster on expectations of

interest rate cuts to support a weakening economy.

The U.S. yield curve disinverted in August.

Kenneth Broux head of corporate research FX and rates at

Societe Generale said the German yield curve disinversion "is

more than symbolic on a day when the weak PMIs will inevitably

fuel the debate about (an) October rate cut by the ECB".

"Are they behind the curve on inflation v growth?" he said.

Purchasing manager index survey data on Monday showed

France's services sector contracted sharply in September, after

a strong August driven by the Olympic Games.

That was followed by German data showing business activity

in the euro zone's largest economy contracted at its sharpest

pace in seven months in September.

Markets are currently pricing around a one in three chance

that the European Central Bank will cut rates by 25 bps at its

October meeting.

French bonds were less moved by the data than German,

suggesting the latter were seeing safe-haven inflows and

concerns that politics are keeping investors away from French

debt. France's 10-year yield fell 3 bps to 2.94%.

That caused the gap between German and French 10-year yields

to widen to 79 bps, its widest since market volatility in early

August.

That spread, a gauge of the higher returns investors demand

for holding French debt over the European benchmark, has been in

focus since it widened sharply in the run up to France's

parliamentary elections earlier in the year.

Italy's 10-year yield was down 4 bps at 3.53%, and the gap

between Italian and German 10 year yields was 137 bps.