UPDATE 2-German bond yields hit 8-week high as Trump tax plan revives reflation bets

reflation bets@

* Bund yield back at 0.50 percent, hits highest since Aug. 1

* U.S. Treasury yields at highest since July

* Trump outlines U.S. tax overhaul

* Euro zone periphery govt bond yields http://tmsnrt.rs/2ii2Bqr (Adds German state inflation data, updates prices)

LONDON, Sept 28 (Reuters) - German bond yields hit eight-week highs on Thursday, leading a rise in euro zone borrowing costs as U.S. President Donald Trump proposed the biggest U.S. tax overhaul in three decades and strong data boosted the case for another rate hike this year.

Trump on Wednesday proposed to lower corporate and small-business income tax rates, reduce the top income tax rate for high-earning American individuals and scrap some popular tax breaks.

The plan has revived expectations that his policies will boost the U.S. economy and inflation - an environment that tends to put upward pressure on government bond yields.

It also comes in a week where U.S. Federal Reserve chief Janet Yellen confirmed the outlook for further rate rises, while better-than-expected U.S. durable goods orders data suggested inflation may be picking up.

"The market had given up on the Trump reflation trade and this is coming back with a bit more detail on tax plans," said Commerzbank analyst Rainer Guntermann.

"At the same time, this gives the Fed more ammunition to hike rates in the coming months."

Investors reacted by selling bonds in the United States and Europe, with yields on higher-rated euro zone countries up 3-4 basis points.

When the price of a bond falls, the yield rises.

Germany's benchmark 10-year bond yield rose 5 bps to 0.518 percent at one stage, its highest level in eight weeks, before settling at 0.50 percent around midday.

U.S. 10-year Treasury yields were up 3 bps on the day at 2.34 percent. At one point, the gap with German peers was at 185 bps - the widest since early July.

With Trump's tax reform plans boosting the dollar, the euro pulled back further from recent 2-1/2 year highs.

Analysts said a weakening in the single currency was another headwind for euro zone bond markets since this could encourage the European Central Bank to pursue plans to scale back the monetary stimulus that has long underpinned bond yields.

Strength in the single currency, which dampens inflation, has been seen as an obstacle in the path of ECB tapering.

However, inflation data from a string of German states showed that consumer prices are increasing at a healthy rate in Europe's largest economy.

States such as North Rhine Westphalia, Hesse, Saxony and Bavaria all showed inflation of between 1.8-2.1 percent for the month of September.

An overall German inflation figure is due out at 1200 GMT. The European Central Bank targets inflation of just below 2 percent for the bloc as a whole.

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

(Additional reporting by Abhinav Ramnarayan, Editing by Mark Heinrich)