German bond yield at six-week low with inflation expected to dip

* Preliminary inflation data for July due at 1200 GMT

* Economists expect slight dip in July

* Could erode expectations for ECB monetary tightening

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

LONDON, July 28 (Reuters) - Germany's short-term borrowing costs held at six-week lows on Friday ahead of data expected to show consumer price growth slowing in the euro zone's largest economy.

A marked appreciation in the single currency over the past two months should have dampened July's inflation data, analysts say, which comes at the end of a week in which policymakers in the United States warned of muted price growth.

If Germany's preliminary readings for July come a shade below last month's data, as predicted in Reuters' polls, that could erode expectations that the European Central Bank is gearing up to remove its massive monetary stimulus programme.

"The implication is that the metric which is of relevance for the ECB - the inflation trend across the currency union as a whole, due to be published on Monday - should also continue to hover distinctly below the central bank's 2 percent target," DZ Bank strategist Christian Lenk said.

"(ECB chief Mario) Draghi's exit from its ultra-accommodative monetary stance is probably going to be correspondingly slow."

Bond yields across the euro zone, which are highly sensitive to inflation because of its implication for long-term interest rates, were flat or a touch lower on Friday ahead of the data.

Germany's two-year yield - a key benchmark in the bloc - held at six-week lows of minus 0.675 percent. Ten-year yields were unchanged at 0.53 percent.

The euro, which has appreciated nearly 5 percent over the last two months against the dollar, eroding people's spending power and capping price rises, was near a 2-1/2-year high .

An initial reading of French inflation data for July came bang in line with expectations of 0.8 percent, unchanged from the previous month.

Spain then posted 1.7 percent year-on-year, a touch above forecasts and last month's 1.6 percent print.

But the key data release for the day is due at 1200 GMT. Regional releases throughout the morning should give a clue as to whether economists' predictions for 1.4 percent inflation, below last month's reading of 1.5 percent, are accurate.

Monday's flash inflation data for the euro area as a whole, is forecast at 1.2 percent year-on-year, a shade below June's 1.3 percent reading and well below the ECB's near 2 percent target.

But some analysts warned the market could be caught off guard on Friday.

"A strong reading ... would run counter to the downtrend in inflation observed since CPI peaked at the beginning of the year and could thus catch the market wrong-footed," Mizuho strategist Peter Chatwell said.

"This is especially true if inflation managed to weather the euro rise and its deflationary effect."

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 Alison Williams)