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UPDATE 2-U.S. data tips euro zone yields off highs

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* Italy's 10-year yield hits highest since Sept. 2020

* Bunds monitored closely for new trend -UniCredit (Recasts, adds analyst comment, background)

By Yoruk Bahceli and Stefano Rebaudo

May 3 (Reuters) - Euro zone government bond yields tracked U.S. Treasuries lower on Monday, reversing earlier gains, after data showing U.S. manufacturing activity grew more slowly in April. [nL1N2MM0SL

Germany's 10-year Bund yield, the benchmark for the region, was down 1 basis point at -0.214%, after rising to a new high since March 2020 at -0.162%.

"European yields are now tracking U.S. yields after data on U.S. manufacturing activity," Antonio Cesarano, chief global strategist at Intermonte, said of the move.

Italy's 10-year yield was down 3 bps at 0.837%, after scaling a new high since September 2020 at 0.903%.

"Uncertainty about the timing of Italy's Recovery Plan has been weighing on Italian bonds recently, driving peripheral yields higher," Cesarano added.

Expectations of higher growth and inflation, first triggered by fiscal stimulus in the United States, have pushed government borrowing costs on both sides of the Atlantic higher this year.

Investors are on the lookout for signs that central banks may start scaling back extraordinary monetary stimulus, which still holds down bond yields.

The European Central Bank bought a net 21.272 billion euros ($17.65 billion) of assets last week as part of its quantitative easing programme.

Arne Petimezas, analyst at AFS Group in Amsterdam, said that while he did not see a specific driver behind Monday's move, it is in line with expectations.

"Recovery is picking up, vaccinations are accelerating, reopening is nearing," he said.

Some investors ended April expecting a further rise in euro area government bond yields as vaccinations speed up.

UniCredit analysts said German Bunds would be monitored "particularly closely" for any indication as to whether last week's sell-off may be the beginning of a new trend.

There is also concern about market unease ahead of the ECB's June meeting, where it will have to review its March decision to speed up its pandemic emergency bond purchases.

It can start phasing out emergency measures when the pace of vaccinations reaches a critical level and the economy picks up, Vice President Luis de Guindos said.

Monday's yield rise came with German retail sales posting an unexpected surge in March as the relaxation of some lockdown measures stimulated purchases.

But euro zone April manufacturing activity data came in slightly below an initial estimate, although still at the highest since the survey began in 1997.

The moves also came in a quiet trading session given a public holiday in London, as well as Japan and China, which can dampen market liquidity and exaggerate moves. (Reporting by Yoruk Bahceli and Stefano Rebaudo; Editing by Alexander Smith)