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Euro zone bond yields drop after ECB's Schnabel scraps more rate hikes

(Adds context, analyst comment and more assets)

By Harry Robertson

LONDON, Dec 5 (Reuters) - Euro zone bond yields fell to new multi-month lows on Tuesday after European Central Bank official Isabel Schnabel said further interest hikes are "rather unlikely" in an interview with Reuters, after a marked slowdown in inflation in November.

Germany's 10-year bond yield fell 7 basis points (bps) to 2.279%, its lowest since June, with several market analysts attributing the drop to Schnabel's comments.

Schnabel said she has shifted her stance after three unexpectedly benign inflation readings in a row. November's figure showed that price rises slowed to 2.4% year-on-year, near the ECB's 2% target and down sharply from more than 10% a year earlier.

"The most recent inflation number has made a further rate increase rather unlikely," Schnabel said.

Germany's 2-year bond yield, which is sensitive to ECB rate expectations, fell 8 bps to 2.602%, its lowest since mid-May.

Schnabel's comments were having a "massive impact", said Jussi Hiljanen, head of European rates strategy at lender SEB, who said the German official was one of the most influential policymakers on the ECB's Governing Council.

"The hawks are clearly turning more dovish," he said. "I would say it's almost impossible now to push back against the rate cut expectations."

On Tuesday, traders in euro zone money markets reckoned there was a roughly 84% chance of a 25-bp cut coming in March, up from around 72% the previous day. They now envisage more than 140 bps of cuts by the end of December.

Italy's 10-year bond yield was last down 6 bps to 4.053%, its lowest since late July.

The gap between Italian and German 10-year yields fell slightly to 175 bps. (Reporting by Harry Robertson and Alun John; Editing by Amanda Cooper and Sharon Singleton)

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