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UPDATE 1-Euro zone bond yields rise as upbeat data boosts Fed-hike bets

* Euro zone bond yields broadly higher

* Strong U.S. economic data pushes up dollar

* Weaker euro keeps ECB policy outlook in focus

* Spain in spotlight as Catalonia tensions simmer

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

LONDON, Oct 3 (Reuters) - Germany led a rise in bond yields across the euro zone on Tuesday as strong U.S. data reinforced expectations of another interest rate rise this year by the Federal Reserve.

A pro-independence protest in Catalonia kept tensions between the wealthy Spanish region and the central government in Madrid in the spotlight, although Spain's bond market was calmer after heavy selling the previous day after by an independence vote on Sunday that was marred by police violence.

The overall mood across government bond markets was bearish as investors took their cue from upbeat economic data to sell fixed income and buy risk assets such as stocks.

The U.S. Institute for Supply Management index, released on Monday, rose to 60.8 in September, from 58.8 in August, exceeding analyst expectations. The components of the index showed gains across the board.

That boosted expectations for another U.S. rate rise this year, lifting the dollar. The euro, in turn, fell to a 1-1/2-month low just below $1.17.

A weakening in the single currency is seen as a headwind for bond markets since it could encourage the European Central Bank to press ahead with plans to unwind its massive stimulus scheme.

The euro, up around 12 percent against the dollar this year, has complicated the ECB's plans for exiting its stimulus scheme because a strong currency puts downward pressure on inflation.

Data on Tuesday showed euro zone producer prices rose a higher-than-expected 2.5 percent in August compared with a year earlier.

Most bond yields in the bloc were up 2-4 basis points on the day. Germany's benchmark 10-year yield rose 4 bps to 0.49 percent, heading back towards 8-week highs hit last week after a tax plan from the U.S. administration renewed reflation bets.

Two-year U.S. Treasury yields hovered near 9-year peaks hit on Monday.

"People are still watching what the Fed is doing and in Europe, how the ECB will act," said Benjamin Schroeder, senior rates strategist at ING.

Analysts said data on ECB bond buying, due out later in the day, would be scrutinised for signs on how close the central bank is to hitting its self-imposed limits for bond purchases.

A scarcity of eligible debt for quantitative easing is one reason why many economists anticipate ECB tapering in early 2018.

Spain's 10-year yield was up 2 bps at 1.70 percent , but off highs seen in the wake of Sunday's banned independence referendum in Catalonia.

The gap over German Bund yields narrowed to around 121 bps, having been at its widest level in around four months on Monday at around 126 bps.

"We don't think tail risks from Catalonia will continue because this is a Spanish issue not a euro zone existential issue," said Peter Chatwell, head of euro rates strategy at Mizuho.

(Reporting by Dhara Ranasinghe; Editing by Alison Williams)