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UPDATE 1-Worries over U.S. politics and policy lift demand for euro zone debt

* Trump Jr. emails, Yellen testimony drive flows to euro zone

* Euro zone bond yields 3-4 bps lower

* German auction lifts sentiment, Portugal also sells bonds

* Euro zone periphery govt bond yields http://tmsnrt.rs/2ii2Bqr (Adds auction details, updates prices)

LONDON, July 12 (Reuters) - Concerns over U.S. politics and policy helped drive demand back into euro zone government bonds on Wednesday, pushing yields down further from multi-month highs hit earlier this week.

Decent demand at a sale of German 10-year bonds, the first auction of the long-dated debt since a sharp selloff began two weeks ago, helped boost sentiment.

But it was the U.S. that held the spotlight. Investors were awaiting Congressional testimony by U.S. Federal Reserve chief Janet Yellen, as well as the fallout over a chain of emails that showed President Donald Trump's eldest son welcoming help from a Russian lawyer during his father's 2016 election campaign against Hillary Clinton.

"There's a little bit of nervousness in the market after the news overnight from the U.S. and ahead of the Yellen speech," said DZ Bank strategist Christian Lenk. "Also it helps that yields are now at high levels, that might be driving some of the flows."

Yellen will testify to Congress on the state of the U.S. economy and markets will be watching the speech closely for any clues on rate hikes and the plan for reducing the Fed's balance sheet.

While the latest U.S. employment figures beat expectations, economic data from the world's biggest economy has been patchy this year and has generally been outperformed by the euro zone.

On Tuesday, two of Yellen's colleagues cited low wage growth and muted inflation as reasons for caution on further interest rate increases.

BBVA strategist Jaime Costero Denche said the tone Yellen adopts on inflation will be key; an upbeat assessment would imply that the Fed is primed to go ahead with unwinding post-crisis monetary stimulus.

Higher-rated euro zone government bonds, which are considered amongst the safest financial assets in the world, were lower 3-4 basis points across the curve.

Germany's 10-year government bond yield fell 3 bps to 0.53 percent, extending its decline after a sale of around 4 billion euros of new 10-year Bunds.

"Our expectation going into the auction was that the 60 basis point yield would be a good level for outright investors to enter the market, so I'm not surprised it went well," said Mizuho rates strategist Antoine Bouvet.

Bund yields are now more than double their 0.25 percent level of two weeks ago, when European Central Bank chief Mario Draghi triggered a selloff in euro zone government bond markets by suggesting the bank was open to policy tweaks.

Portugal also held a debt auction, selling a 28-year bond - the longest-dated maturity it has placed in a regular auction since before the 2010 debt crisis.

For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.bi z / c m s / ? p a g e I d = l i v e m a r k e t s

(Editing by Hugh Lawson)