* Weak BoJ auction lifts euro zone yields
* Euro zone inflation due at 0900 GMT
* 10-year core euro zone yields up 2-3 bps
* Euro zone periphery govt bond yields http://tmsnrt.rs/2ii2Bqr
LONDON, Oct 1 (Reuters) - Euro zone bond yields extended their move higher on Tuesday after a weak auction of Japanese government bonds, while investors focused on upcoming inflation data that if weak would send traders back into government debt.
Government bond yields slumped to record lows in early September as fund managers fearful of an economic downturn scrambled into government debt, but investors have since been cutting back on their bond holdings, believing European Central Bank monetary policy easing may have run its course for now.
ECB President Mario Draghi's emphasis again on Monday on the need for fiscal policy to support the bloc's long-term growth prospects further lifted yields at the start of the week.
After the Bank of Japan cut purchases in long tenors on Monday, investor demand for a 10-year bond auction was weak and government bond prices slumped. That fed across to higher bond yields across major markets, with German, French and Spanish yields all up 2 to 3 basis points.
Peter Chatwell, a rates strategist at Mizuho bank, said the BoJ reaction to euro zone inflation numbers, due at 0900 GMT, would the key metric for markets on Tuesday.
"What will be interesting is the market reaction to euro zone headline inflation below 1%," he said. A Reuters poll of economists is forecasting inflation in September of 1%, but Mizuho thinks it will come in below the 1% mark.
Weakening energy prices and inflation expectations "should be something to worry about" and while the number alone won't be sufficient to cause a rally in bonds, it should be enough to "allow the market to firm up", Chatwell said.
Analysts at ING noted that there had been downward surprises in inflation data across several euro zone states.
"Our broader point is thus reinforced: there likely is further downward adjustment needed in investors positioning to reflect the set of poor economic releases over the past weeks," they said in a research note.
The Purchasing Managers' Index manufacturing survey data for the euro zone region is also published on Tuesday, although with most countries have reported individually already the release is not expected to move markets significantly.
The benchmark 10-year German bond yield rose 3 basis points to -0.536%, while the 30-year was up 5 bps at -0.048 .
Other core euro zone bond yields also rose, with the French 10-year up more than 4 basis points.
Yields on Italian bonds, which have seen a dramatic contraction since August as investors welcomed the formation of a government deemed more fiscally responsible than the last, edged up slightly .
Analysts said the key focus this week is on the launch of the euro short-term rate ESTR, a new inter-bank lending rate which will be published for the first time on Wednesday, as the ECB ceases to publish EONIA, the current overnight benchmark. (Editing by Alison Williams)