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UPDATE 2-Demand for German bonds swells as Trump escalates N. Korea rhetoric

* Germany's 10-year yields hit fresh six-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 (Adds bond quotes, updates prices)

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 threats against North Korea.

Trump said his earlier pledge 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 traditionally safer 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 moves inversely to the price -- dropped below 0.40 percent for the first time since June 29. It fell 3 bps on the day to 0.385 percent, more than 20 bps below its July peak.

Short-dated two-year German bond yields were at their lowest level since mid-June at minus 0.71 percent.

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 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 at 166 basis points, as much as 13 basis points wider than just a week ago.

Trading in money market futures suggest investors anticipate roughly a 60 percent chance of rate hike from the ECB by the end of 2018. That's down sharply from earlier this month when a rate hike was fully priced in and last month when investors priced in a rate hike as early as next June.

Later on Friday, the U.S. will release inflation data for July. The forecast is for consumer prices 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

(Reporting by Abhinav Ramnarayan, Additional reporting by Dhara Ranasinghe, Editing by Jeremy Gaunt)