UPDATE 1-Demand for German bonds swells as Trump escalates N. Korea rhetoric

* Germany's 10-year yields hit fresh three-week low of 0.40 pct

* Safe assets in demand as Trump says "fire and fury" not enough

* U.S. inflation data could put monetary policy back in spotlight

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

LONDON, Aug 11 (Reuters) - Demand for German government bonds -- seen as one of the safest financial securities in the world -- intensified on Friday as U.S. President Donald Trump issued a new round of fiery rhetoric against North Korea.

Trump said his earlier threat to unleash "fire and fury" on Pyongyang may not have been tough enough, after North Korea's state run news agency said earlier it would complete plans in mid-August to fire four missiles to land near Guam.

U.S. and Asian stocks plunged overnight, with investors instead fleeing to safe haven assets including German government bonds, among the best-rated and most liquid assets in the world.

"Geopolitical tensions are the main focus: the S&P 500 was down 1.5 percent last night and many investors are becoming risk averse. That is helpful for German bonds," said DZ Bank strategist Andy Cossor.

As a result, Germany's 10-year government bond yields -- which move inversely to the price -- dropped below 0.40 percent for the first time since June 29, almost 20 bps below its July peak.

This fall comes even though long-term euro zone inflation expectations remain fairly high and investors are anticipating a withdrawal of extraordinary monetary stimulus from the European Central Bank, factors that should normally push yields higher.

Japanese, British and U.S. 10-year government bond yields are also at or close to their lowest level since late June.

The gap between Italian and German borrowing costs - a closely-followed measure of political tensions - reached its widest level in over three weeks on Friday.

"If you're looking for safe haven assets then German bonds definitely is a better bet than Italy, but then all the peripheral spreads were close to lows so probably investors were happy to take profits as well," said Cossor of DZ Bank.

The Italy-Germany 10-year government bond yield spread widened to 162 basis points, as much as 10 basis points wider than a month ago.

Later on Friday, the U.S. will release inflation data for the month of July. The forecast is for consumer prices in the world's biggest economy to increase by 0.2 percent over the previous month and 1.8 percent over the same month in 2016.

A strong number will strengthen expectations that the U.S. Federal Reserve will go ahead with rate hikes and the reduction of a mammoth balance sheet built up through years of post-crisis monetary stimulus.

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 Matthew Mpoke Bigg)