EURO GOVT-Italy, Spain yields dip after manufacturing data
* U.S. ISM manufacturing PMIs eyed, before Friday's payrolls
* Loose ECB policy stance seen stabilising euro zone debt
(Adds other euro zone markets, more quotes)
LONDON, July 1 (Reuters) - Italian and Spanish government bond yields fell on Monday, outperforming German debt, after euro zone manufacturing data showed signs of stabilisation in the region's weaker economies.
Surveys showed Italian factory activity shrank at its slowest in two years in June while Spanish manufacturing held steady after shrinking for more than two years.
Spanish 10-year yields fell 7 basis points to 4.65 percent while equivalent Italian yields were 5 bps lower at 4.49 percent.
But market participants saw little scope for sharper falls in euro zone yields before the European Central Bank's policy meeting on Thursday and U.S. data that could shed light on when the Federal Reserve might start reducing its bond purchases.
"Italy and Spain are reasonably well bid after those PMIs but it's pretty thin volumes. Markets are still looking to U.S. data for direction," one trader said.
Critical for markets this week is the U.S. jobs data due on Friday, given it is a key measure for the Fed to consider before deciding to start withdrawing stimulus.
Investors will be also parsing the U.S. ISM manufacturing report later on Monday. The numbers are expected to show an improvement in activity in June back above the 50.0 level that separates expansion from contraction.
German Bunds started the third quarter lower, after posting a second month of losses in June as the prospect of reduced U.S. stimulus rocked global bond, equity and commodities markets.
The September Bund future was last 22 ticks down at 141.27 with cash 10-year yields up 2 bps at 1.75 percent in edgy trading before the U.S. data.
"Labour market indicators will be absolutely crucial for the timing of the tapering of QE (quantitative easing)," RIA Capital Markets strategist Nick Stamenkovic said.
"Hence if we see a strong employment report on Friday it will reinforce market expectations that the Fed will slow down the pace of QE by September at the latest and put pressure on bonds."
(Editing by Nigel Stephenson)