UPDATE 1-Euro zone yields rise as traders hope for Brexit resolution

Tommy Wilkes and Yoruk Bahceli

* Yields edge 1-2 bps higher

* Brexit, economic uncertainty hovers over markets

* S&P ratings review scheduled for Italy & Greece

* Euro zone periphery govt bond yields http://tmsnrt.rs/2ii2Bqr (Recasts, updates with Ifo survey, analyst comment)

LONDON, Oct 25 (Reuters) - Euro zone yields rose on Friday as business sentiment data out of Germany provided some economic optimism and investors hoped political uncertainty in Britain would end with a Brexit deal being approved.

German business morale held steady in October and Europe's largest economy should expand slightly in the fourth quarter after contracting earlier in the year, the Ifo economic institute said on Friday.

The survey followed business surveys on Thursday reaffirming that the euro zone economy is struggling, although economists say there was some evidence the situation is at least not worsening.

Most 10-year bond yields were up 2 basis points on the day with Germany's 10-year benchmark yield at -0.38%.

The data is "not as important as the broad context of the PMIs are in terms of the market's focus," said Mizuho rates strategist Peter McCallum, not seeing Friday's market moves as driven by any change in the economic outlook.

There is "a lot of uncertainty with the U.S.-China negotiations taking place today. We don't know what's happenng in terms of the UK developments, both on the (Brexit) extension or whether Boris's motion to press forward with an election will be passed on Monday," he added.

U.S. and Chinese trade officials will discuss plans on Friday for China to buy more U.S. farm products, while Beijing will request cancellation of some planned and existing U.S. tariffs on Chinese imports, according to people briefed on the talks.

Meanwhile, the European Union looked set on Friday to delay a decision on Britain's request for a Brexit extension beyond the scheduled Oct. 31 exit date, to give time for Britain's parliament to decide on Prime Minister Boris Johnson's call for a December election.

Euro zone bond markets have largely shrugged off Johnson's election call. Natixis strategist Cyril Regnat said this was because it raised hopes of another vote in the UK parliament on the Brexit deal.

Investors are now waiting for the European Union's response to the extension.

"As long as we don't have any official agreement between the EU and UK, even if it's probably a very small risk, there is still a risk we end up with a no-deal," Regnat said.

Later on Friday, S&P is scheduled to publish its ratings review of Italy and Greece.

Analysts watch S&P's Italy rating closely given its negative outlook, as a downgrade would put Italy's average rating from the three major rating agencies - Moody's and Fitch alongside S&P - one notch above junk.

UniCredit analysts expect S&P to upgrade the Greek rating by one notch but to leave Italy's unchanged at BBB with a negative outlook.

"In the short term, Italy's economic outlook remains highly uncertain, and activity is likely to stagnate this year and to recover modestly in 2020," they said in a client note.

Trade tensions between the United States and Europe had "increased downside risk," they said.

Italian yields rose 1 bp on Friday, with the 10-year yield at 1.02%. The sovereign sold 3 billion euros of two-year bonds in an auction. (Reporting by Tommy Reggiori Wilkes and Yoruk Bahceli Editing by Larry King and Frances Kerry)