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UPDATE 1-German 30-year bond yield falls to lowest this year after Fed

* Updates throughout

* Germany's 30-year yield lowest since December 2017

* Euro zone yields drop 2-3 bps post Fed

* Fed hikes rates, but less hawkish than expected

* Euro zone PMIs, BOE meeting in focus

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

LONDON, March 22 (Reuters) - Germany's 30-year government bond yield hit its lowest level this year on Thursday, after the U.S. Federal Reserve raised interest rates and forecast two more increases for 2018 rather than the three that markets had expected.

The move late on Wednesday drove euro zone bond yields down by 2-3 basis points at the open of European trade on Thursday.

Germany's 30-year bond yield fell 3 basis points to 1.189 percent, its lowest since December 2017, and was set for its biggest one-day fall in a month.

The Fed raised interest rates on Wednesday and forecast at least two more hikes for 2018, highlighting its growing confidence that tax cuts and government spending will boost the economy and inflation and spur more aggressive future tightening.

"To some extent the market was expecting a hawkish Fed, but did not get a signal for a fourth rate hike this year," said Orlando Green, European fixed income strategist at Credit Agricole.

He added that a reversal of short positions in the U.S. bond market after the Fed meeting and risk factors such as the potential threat of a trade war were also supporting safe-haven debt markets.

Later on Thursday, U.S. President Donald Trump is expected to announce tariffs on Chinese imports, in a move that will likely to trigger retaliation from Beijing.

U.S. Treasury yields extended their fall in European trade, with 10-year Treasury yields down 5 basis points at 2.86 percent .

Data suggesting that the euro zone economy is losing some steam also supported bond prices, pushing yields down.

Markit's German flash composite Purchasing Managers' Index (PMI), which tracks the manufacturing and services sectors that together account for more than two-thirds of the economy, fell to 55.4 from 57.6 the previous month.

PMI data for France showed on Thursday that a stronger euro was weighing on France's manufacturing renaissance, with growth in factories' output softening for the third consecutive month despite running at a still decent clip.

A Bank of England meeting was also in focus after strong wage data on Tuesday boosted expectations for a May rate hike.

Britain's central bank is likely to keep on course on Thursday for an interest rate rise in May which would take borrowing costs above their emergency levels for the first time since the financial crisis more than a decade ago.

(Reporting by Fanny Potkin; Additional reporting by Dhara Ranasinghe Editing by Keith Weir)