UPDATE 2-German two-year bond yield hits seven-week low after auction

* Germany sells 3.2 bn euros of negative-yielding bonds

Demand twice the amount of bonds allotted

* Euro zone bond yields broadly lower on day

* Euro zone periphery govt bond yields http://tmsnrt.rs/2ii2Bqr (Updates prices)

By Dhara Ranasinghe and John Geddie

LONDON, Aug 1 (Reuters) - Germany's two-year bond yields fell to a seven-week low on Tuesday, following firm demand at an auction of the debt.

The euro zone's benchmark bond issuer sold 3.219 billion euros of the zero-coupon bonds. Demand was twice the amount of the bonds allocated to investors.

Analysts said a number of factors had supported demand for short-dated bonds from the bloc's biggest economy.

Central bank buying for European Central Bank stimulus has recently been skewed towards the bonds, a trend which should continue to push prices higher and yields lower.

In addition, a rally in the euro has broadly lifted demand for euro-denominated assets, with short-dated German debt the most freely available because it is widely traded.

The common currency is trading near 2-1/2-year highs against the dollar and is up around 13 percent so far this year.

Finally, a view that the ECB is unlikely to raise interest rates anytime soon even as it looks to scale back its stimulus scheme has anchored short-dated bond yields.

While long-dated bond yields in Germany have risen and held at higher levels since a speech by ECB chief Mario Draghi in Portugal in late June, short-dated peers have given up initial rises to head back down.

Trade in money market futures suggests investors do not expect the ECB to lift interest rates until the final quarter of 2018.

"The Schatz auction went rather well despite the still low yield levels on these bonds," said DZ Bank strategist Christian Lenk. "We have retraced from the highs seen at the end of June and this partly reflects a view that the ECB won't lift rates soon."

Germany's two-year yield fell as much as 3 basis points to minus 0.703 percent, its lowest since June 13.

Most 10-year bond yields across the euro zone were 5-6 basis points lower on the day.

Elsewhere, data showed euro zone growth remained robust in the second quarter after a strong reading in the first three months of the year.

Eurostat said gross domestic product in the 19-country bloc increased 0.6 percent on the quarter in the second quarter and 2.1 percent on the year, in line with forecasts of economists polled by Reuters.

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

(Reporting by Dhara Ranasinghe and John Geddie; Editing by Gareth Jones and John Stonestreet)