UPDATE 1-Germany's two-year bond yield falls to three-month low

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

LONDON, Dec 7 (Reuters) - Germany's two-year government bond yield fell to a three-month low on Thursday, as global political uncertainty and anticipation of increased buying by the European Central Bank before the end of the year continued to boost appetite for debt from Europe's biggest economy.

U.S. Treasury yields fell across the board on Wednesday as risk appetite dwindled after a sell-off in some foreign equity markets and U.S. President Donald Trump's recognition of Jerusalem as Israel's capital touched off a storm of protest from world leaders.

That set the tone for the start of the European session. In addition, analysts said, front-loading of ECB asset purchases before the end of the year pushed German yields down.

The ECB said earlier this week it will not purchase bonds as part of its stimulus package from Dec. 21 to Dec. 29, expecting market liquidity will drop around the Christmas holidays.

Germany's two-year bond yield fell just over a basis point on Thursday to -0.793 percent, its lowest level since Sept. 8. Ten-year bond yields hovered close to three-month lows hit the previous session at 0.29 percent.

"Overall a moderate risk off tone had crept into markets," analysts at ING said.

Most 10-year bond yields in the euro area were flat ahead of Spain and France's last bond sale of the year.

France is expected to sell 3 billion to 4 billion euros of long-dated debt, Spain up to 4 billion euros of five-year bonds.

European Central Bank chief Mario Draghi is scheduled to speak later this session.

A key overnight benchmark rate that European banks use to lend money to each other remained in focus after surging last week.

The Euro Over Night Index Average (EONIA) was fixed at minus 0.326 percent on Wednesday, down from a high of minus 0.241 percent last week. But it remains elevateds, suggesting distortions in the market persist, analysts said.

"We feel affirmed in our suspicion that excess liquidity at a periphery panel bank is rather to blame," Commerzbank analysts said in a note. "This means that the distortion should become more persistent and the fixing more erratic."

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(Reporting by Dhara Ranasinghe, editing by Larry King)