JGBs firm, underpinned as Europe concerns weigh on stocks

* Benchmark bonds erase losses; 10-yr yield flat

* 10-yr futures end above 14-, 20-day moving averages

TOKYO, Feb 8 (Reuters) - Japanese government bonds were steady on Friday, supported as renewed worries about the health of the European economy dragged down stocks, but also lacking momentum in thin trade ahead of a long weekend in Japan. Benchmark notes erased earlier losses, with the yield on the 10-year JGB flat at 0.760 percent, down from as high as 0.775 percent and remaining within its recent range. The 10-year yield has wavered between 0.720 percent hit on Jan. 25, then a six-week low and a three-week high of 0.805 percent touched on Monday this week. "A pullback in stocks is supporting futures, but cash bond trading is thin today, with a perception that the rally on the short end may have been overdone," said a fixed income fund manager at a Japanese asset management firm. The Nikkei share average dropped 1.8 percent after downbeat comments on Europe's outlook from the head of the European Central Bank. The Bank of Japan is expected to keep monetary policy steady at its next meeting ending Thursday but JGBs were also supported the central bank remains under relentless pressure from new Prime Minister Shinzo Abe to help pull the economy out of deflation. Current account data on Friday underlined grim conditions at the end of the year. But sources familiar with the central bank's thinking said it will consider revising up its assessment of the economy as exports find some relief from recent declines in the yen and a pick-up in global demand.

The five-year yield was flat at 0.135 percent, a record low hit on Thursday, on expectations that the Bank of Japan will eventually take more aggressive easing steps. These could possibly include a return to a zero interest rate policy.

The two-year JGB was untraded on Friday, after its yield fell 2 basis points to 0.025 percent on Thursday, its lowest since 2002. "I think yields could stay around these levels," said Naomi Muguruma, senior fixed-income strategist at Mitsubishi MUFJ Morgan Stanley Securities. "At the latest two-year auction the result was very strong, because the BOJ purchased this sector relentlessly, which tightened underlying supply/demand conditions on the short end," she said. The 10-year JGB futures contract ended up 0.07 point at 144.22, breaking above both its 20-day moving average, now at 144.19, and its 14-day moving average at 144.18. Trading was relatively light at 25,656 contracts, the lowest since Jan. 21. The superlong sector outperformed, though activity was thin. The 20-year bond yield fell 1 basis point to 1.775 percent, while the 30-year bond yield slipped 1.5 basis points to 1.985 percent. Bargain hunters emerged after the 30-year yield topped 2.000 percent, which has been a support level in recent weeks.

(Editing by Edwina Gibbs)