(Updates at 1425 GMT)

By Stefano Rebaudo

June 21 (Reuters) - German government bond yields fell

on Friday after economic survey data for the euro zone came in

weaker than expected, supporting expectations for policy rate

cuts.

Euro zone yields bounced around in the afternoon session in

Europe, as traders digested U.S. data showing a pick-up in

business activity and remained nervous about political

uncertainty in France.

Euro area business growth decelerated sharply this month as

demand fell for the first time since February, survey-based data

showed on Friday.

Weak demand dragged down France's business activity as the

country heads into a snap parliamentary election, while an

upturn in Germany slowed in June.

German 10-year bond yields, the benchmark for

the euro area, fell 3 basis points to 2.399%.

French 10-year yields, fell in morning trading

before reversing course later in the day to trade roughly flat

at 3.156%.

The gap between French and German 10-year yields

- a gauge of risk premium investors demand to hold

French government bonds - widened 3 bps to 75 bps, having gapped

to around 80 bps last Friday, its widest level since February

2017.

Surveys "suggest a solid recovery in the euro zone economy

is not a done deal", said Franziska Palmas, senior European

economist at Capital Economics.

"Meanwhile, aggregate price pressures continued to ease but

remained strong in the services sector, which will keep ECB

policymakers cautious," she added.

Money markets price in around 70 bps of cumulative European

Central Bank rate cuts by year-end from 65

bps before PMI data, implying a further move and a 70% chance of

a third cut in 2024.

Bund yields were on track for a 4-bp weekly rise, as hopes

that France's far right National Rally (RN) party will backtrack

on fiscally expensive pledges stopped last week's rush into

safe-haven assets.

"OATs (French government bonds) look priced for a hung

parliament/RN-lead with a benign fiscal outcome but might widen

sharply to 100 bps over Bunds on a more forceful far-right/left

manifesto implementation, while tightening to 60 bps on a

centrist coalition," Citi analysts said.

RN is seen leading the first round of the country's

parliamentary elections with 35% of the votes, according to a

survey released on Thursday. President Emmanuel Macron's

centrist camp was in third place with 20% of the votes.

Market sentiment towards France and the euro area's most

indebted countries improved on Thursday as the market got

through a French bond auction largely unscathed.

There were also hopes of monetary easing ahead after the

Swiss National Bank marginally surprised markets by cutting

rates, and the Bank of England delivered a dovish message,

analysts said.

Italy's 10-year yield was down 1 bp at 3.931%,

while the Italian-German yield gap stood slightly wider

at 153 bps.

(Reporting by Stefano Rebaudo, additional reporting by Harry

Robertson, editing by Alex Richardson and Emelia

Sithole-Matarise)