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* Euro zone bond yields lower, bar Italy
* Markets slightly calmer after Wednesday's sharp moves
* France to sell government bonds
* Euro zone periphery bond yields http://tmsnrt.rs/2ii2Bqr
LONDON, May 16 (Reuters) - Germany's benchmark 10-year bond yield fell on Thursday, keeping close to more than 2-1/2 year lows hit the previous day on concern about U.S.-China trade relations and fears Italy may break European Union fiscal rules.
Overnight news that the United States has hit Chinese telecoms giant Huawei with severe sanctions, adding another incendiary element to the U.S.-China trade dispute, continued to support higher-rated bonds in the euro area.
"Risk sentiment showed some signs of rebounding late yesterday but I would still err on the side of caution," said KBC rates strategist Mathias van der Jeugt.
"In the medium-term we are positive on core bonds."
In early trade, Germany's 10-year bond yield was down almost two basis points on the day at minus 0.11%, having hit its lowest in around 2-1/2 years on Wednesday at minus 0.13% .
Renewed concern about trade tensions, weak economic growth and risks - be it from Italy or Britain in the form of Brexit uncertainty - have triggered a fresh rush into safe-haven bonds.
France's 10-year bond yield is trading at just 0.3% , close to its lowest since late 2016. Dutch 10-year bond yields are not far from turning negative.
In contrast, Italy's borrowing costs edged higher on worries about the country's budget policies, with yields up to three basis points higher in early trade.
The ruling 5-Star Movement will oppose a budget law that boosts public debt though the government is committed to avoiding an increase in the sales tax that would support state revenues, deputy Prime Minister Luigi Di Maio was quoted as saying on Thursday.
Italy's 10-year bond yield rose 1.5 bps to 2.75%, holding just below Wednesday's peak of around 2.81% which was its highest level since February.
France holds a bond auction later on Thursday in a sale that could provide a test of investor appetite for euro zone debt.
Data released on Tuesday showed Japanese investors bought a record amount of French bonds in March, as low domestic rates and the Federal Reserve's dovish tilt fuelled demand for assets with relatively high yields and solid credit ratings.
(Reporting by Dhara Ranasinghe; Editing by Andrew Cawthorne)