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UPDATE 1-Euro zone bond yields drift higher as trade war rhetoric calms

Dhara Ranasinghe

* Ifo business climate index falls to lowest since 2012

* Euro zone periphery govt bond yields http://tmsnrt.rs/2ii2Bqr (Updates with Ifo survey, Trump comments, updates prices)

LONDON, Aug 26 (Reuters) - Euro zone government bond yields drifted up on Monday after the United States and China sought to ease trade war tensions, lifting sentiment in world markets and taking the shine off safe-haven debt.

But yields - which move in the opposite direction to bond prices - remained close to recent record lows, with data from Germany serving as a reminder that a bitter trade war is pushing Europe's biggest economy toward recession.

The Munich-based Ifo institute said its business climate index fell to 94.3, the lowest since November 2012, from an upwardly revised 95.8 in July.

Most 10-year bond yields in the euro area were about one basis point higher on the day , with trade subdued by a public holiday in Britain.

An increasingly bitter trade war between the world's two largest economies intensified on Friday, with both sides levelling more tariffs on each other's exports.

But on Monday, Beijing called for calm. U.S. President Donald Trump said he believed China was seeking a deal after contacting U.S. trade officials overnight to say it wanted to return to the negotiating table.

"The latest headlines suggest a slight de-escalation," said Rainer Guntermann, a rates strategist at Commerzbank. "...That explains why yields are a bit higher and risk sentiment is picking up."

Germany's 10-year Bund yield was up just 1 basis point at -0.66% after falling to as low as -0.704% in early trade . Thirty-year bond yields gave up early falls to trade flat on the day at -0.16%

U.S. 10-year Treasury yields edged off their lowest since mid-2016.

Analysts said that even with the more positive trade headlines, the latest round of tariffs suggested more pain for the global economy.

"U.S.-China trade tensions are getting worse, not better," said James McCormick, global head of desk strategy at NatWest Markets, referring to Friday's developments.

"While the announced retaliation by China looks measured, the details were targeted at sectors very important to the Trump administration autos, agriculture and oil."

Global trade tensions have stoked concern about the growth outlook this year, pushing bond yields in the euro area deep into negative territory as investors bet on central bank action to shore up growth and inflation.

Germany's 10-year Bund yield has now spent 101 days in sub-zero yield territory, according to Refinitiv data.

Italy's bond yields rose 1-2 bps with focus on talks between parties on forming a new government.

President Sergio Mattarella has given the main opposition Democratic Party and anti-establishment 5-Star until Tuesday to make progress after the previous coalition comprising 5-Star and the far-right League collapsed.

(Reporting by Dhara Ranasinghe Editing by Mark Heinrich and John Stonestreet)