(Updates prices throughout, adds German inflation in paragraph

4 and Wall Street futures in paragraph 8)

By Elizabeth Howcroft

LONDON, April 2 (Reuters) - European stocks held near

all-time highs on Tuesday, while euro zone government bond

yields followed U.S. Treasuries in climbing higher after U.S.

manufacturing data cast doubt on the Federal Reserve's rate cut

forecast.

Data on Monday showed U.S. manufacturing grew for the first

time in 1-1/2 years in March as production rebounded sharply and

new orders increased, highlighting the strength of the economy

and raising doubts about whether the Fed could actually deliver

the three interest rate cuts outlined in its latest forecast.

By contrast, euro zone manufacturing activity contracted at

an even steeper pace in March than in February, as demand

continued to fall, data on Tuesday showed.

German inflation eased, data showed. Broader euro zone

inflation data is due on Wednesday, and will be closely watched

for indications about when the European Central Bank will cut

rates.

European stocks rose in early trading, starting the second

quarter on a positive note as financial markets re-opened after

Easter public holidays. The initial gains eased over the course

of the European morning session.

At 1144 GMT, the pan-European STOXX 600 index was flat

on the day, having hit a new all-time high earlier in the

session. London's FTSE 100 index was up 0.2%,

but Germany's DAX slipped 0.1%.

Big European stocks had surged during the first quarter of

the year.

Wall Street futures were a touch lower, but still within

reach of recent all-time highs. Nasdaq e-minis were down 0.5%

and S&P e-minis were down 0.4%.

"That broad upbeat mood which lifted stocks quite

impressively across the first quarter seems to be sticking

around as we kick off the second quarter," said Fiona Cincotta,

senior markets analyst at City Index.

Monday's U.S. manufacturing data sent yields on U.S.

Treasuries higher and they rose further on Tuesday, with the

benchmark U.S. 10-year yield at 4.3571%, compared to the

previous session's two-week high of 4.337%.

The elevated yields lifted the dollar to its highest in

almost five months on Monday. On Tuesday the dollar index was

steady at 104.94 and the euro was little changed at

$1.07455.

Euro zone government bond yields also followed Treasury

yields higher. Germany's 10-year yield was up around 10 basis

points at 2.394%.

The yen was steady against the dollar at 151.645.

Traders are watching for any signs of intervention from Japanese

authorities, after it touched a 34-year low of 151.975 last

week.

"The continued run of robust U.S. data is making the lives

of Japanese currency officials attempting to support the yen

increasingly uncomfortable," said Tony Sycamore, market analyst

at IG. He said intervention was unlikely until after the 152.00

level was breached.

Japanese Finance Minister Shunichi Suzuki said on Tuesday

that authorities were ready to take appropriate action against

excessive currency market volatility.

Oil prices rose, helped by signs that demand from China and

the United States could improve, as well as by threats to oil

supply.

In the Middle East, an Israeli strike on Iran's embassy in

Syria killed seven military advisors, among them three senior

commanders, marking an escalation in the war in Gaza between

Israel and Hamas, which is supported by Iran. Analysts said

Iran's involvement could impact oil supply.

Ukraine struck one of Russia's biggest refineries on

Tuesday.

Brent crude futures were up 1.26% at $88.52 a barrel

while U.S. West Texas Intermediate crude futures were up 1.42%

at $84.91 a barrel.

Spot gold rose 0.4% to $2,259.7 an ounce, having hit

a new all-time high.