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UPDATE 2-Euro zone bonds yields fall, inflation jitters linger

* Euro zone bond yields still set to end week higher

* U.S. 2-year yields set for biggest weekly rise in almost a year

* Euro zone periphery govt bond yields - http://tmsnrt.rs/2ii2Bqr (Updates prices, adds Coeure & Italy election polls)

LONDON, Feb 16 (Reuters) - Borrowing costs across the euro area fell on Friday, though expectations for higher inflation and steps towards tighter monetary policy from major central banks weighed on sentiment across world bond markets.

Short-dated bond yields in Germany, the euro zone's benchmark bond issuer, have risen by about 7 basis points this week, set for their biggest weekly rise in eight weeks.

In the United States, where data on Wednesday showed consumer prices rose more than expected in January, interest-rate sensitive two-year Treasury yields were set to end the week up 13 bps - the biggest weekly rise in almost a year.

As investors bet the U.S. Federal Reserve could deliver more rate increases than expected this year, bond yields have risen even as stock markets have appeared to shrug off the inflation numbers.

"It has been a U.S. story this week, with the CPI data prompting markets to price in more rate hikes from the Fed," said Mizuho rates strategist Antoine Bouvet.

Expectations for a May rate rise from the Bank of England have also shot up in the past week, while strong economic growth data adds pressure on the European Central Bank to signal a step away from ultra-loose monetary policy.

Economists polled by Reuters believe that the ECB will end its asset-purchase programme by the end of the year and then wait six months before raising interest rates.

ECB board member Benoit Coeure on Friday said that the bank is not overly concerned by the recent bout of volatility in global markets because the adjustment has been orderly and the impact largely contained to equities.

Nevertheless, there was a slightly firmer tone to bond markets on Friday, which analysts attributed to some position-squaring ahead of a long U.S. weekend, with markets shut on Monday for the President's Day holiday.

Ten-year bond yields across the euro zone were 2-5 bps lower on the day.

Germany's benchmark Bund yield was down 5 bps at 0.71 percent, off recent 2-1/2 year highs.

Two-year German bond yields were steady at minus 0.50 percent, having hit their highest since May 2016 on Thursday at about minus 0.47 percent.

"The trend is still for higher bond yields," said Orlando Green, European fixed-income strategist at Credit Agricole.

Southern European bonds in particular outperformed, with Portuguese and Italian 10-year bond yields both hitting a one-week low.

Italy's 10-year bond yields dropped by almost 7 bps to as low as 1.997 percent.

Italian Prime Minister Paolo Gentiloni said on Friday he did not see a risk of an anti-Europe government taking shape after national elections on March 4.

However, a batch of final opinion polls pointed to possible political deadlock, indicating that while Silvio Berlusconi's centre-right bloc has a clear lead, it is unlikely to win a working majority.

There was also focus on Greece, with Fitch Ratings due to release its latest review on the indebted southern European state late on Friday.

Fitch rates Greece B- with a positive outlook. In January S&P lifted Greek long-term ratings for the first time in two years.

(Reporting by Fanny Potkin and Dhara Ranasinghe; Editing by David Goodman)