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Euro zone bond yields steady ahead of flash inflation data

By Dhara Ranasinghe

* Euro zone flash inflation due

* Bond yields edge lower

* Italian bonds outperform peers in Aug

* Euro zone periphery govt bond yields http://tmsnrt.rs/2ii2Bqr

By Dhara Ranasinghe

LONDON, Aug 30 (Reuters) - Euro zone government bond yields were steady near record lows on Friday ahead of the release of inflation numbers for the bloc that are likely to reinforce expectations for European Central Bank stimulus in September.

Germany's benchmark 10-year Bund yield was set for its biggest monthly fall since March.

With economic growth weak and expectations for ECB rate cuts high, German yields hit record lows this week.

And after weaker-than-expected inflation numbers from Germany and Spain on Thursday, a soft overall inflation number for the bloc is anticipated on Friday.

Economists polled by Reuters expect the "flash" reading of annual euro zone inflation to come in at 1% in August, unchanged from July. U.S. inflation data is also due out later in the session.

"Inflation in Europe is expected to continue the slide down to (and possibly through) 1% and previously released data point to a downside surprise to consensus," said Mizuho rates strategist Peter McCallum.

"A reading below 1% would be the lowest year-on-year level since the end of 2016."

In early trade, most 10-year bond yields were steady to a touch higher on the day.

The 10-year Bund yield was flat at -0.69%, within sight of record lows hit earlier this week. It is down around 25 bps this month.

Latest comments from ECB officials were in focus as the bank's September meeting draws closer.

It is too early for the ECB to consider a "huge package" of stimulus measures in response to increasing economic uncertainty, executive board member Sabine Lautenschlaeger said.

Christine Lagarde, the bank's likely future president, was reported saying on Thursday that the ECB still has room to cut rates if needed,

Elsewhere, Italian bond yields rose after three days of falls.

Italian bond prices have soared this week on signs of a new coalition government between the anti-establishment 5-Star Movement and opposition Democratic Party.

But 5-Star has said that before it signs off on the coalition deal it will put the accord to a web-based ballot of its members, which means the risk of renewed uncertainty remains.

Still, Italy's bond market looked set to end September as one of the euro zone's best performers.

The 10-year bond yield, trading around 1% on Friday, is down 52 bps in August.

"Now that we have a lower probability of political instability in Italy, it is possible that yields and the spread will find a new equilibrium," said Sebastian Fellechner, a rates strategist at DZ Bank. (Reporting by Dhara Ranasinghe; Editing by Kirsten Donovan)