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UPDATE 1-Euro zone yields recover from initial fall after Iran strikes

* Euro zone yields flat after initial 1-3 bps falls

* Hefty new supply curbs drop in yields

* Portugal, Germany, Ireland all raising funds

* Euro zone periphery govt bond yields http://tmsnrt.rs/2ii2Bqr (Adds details on Irish, Portuguese bond sales)

LONDON, Jan 8 (Reuters) - Euro zone government bond yields recovered their initial losses on Wednesday as investors' fears of a further and more serious escalation in U.S.-Iran tensions eased, while a flurry of new bond issues from Germany, Ireland and Portugal supported yields.

Iran launched missiles at two bases in Iraq early on Wednesday in retaliation for a U.S. drone strike that killed a top Iranian commander last week and stoked fears of a new Middle East war.

Equity markets fell, the price of gold rose and U.S. Treasury yields dropped, with the 10-year bond yield down around 4 basis points before recovering.

In the euro zone, downward moves in government bond yields were limited and investors across markets pulled back from their initial buying of safe-haven assets as immediate fears of a more significant worsening in Iran-U.S. tensions receded.

"Supply should dominate over geopolitics with Iran's missile attacks not triggering a larger escalation," Commerzbank analysts said, noting that investors were still "keen to put money to work".

Germany is set to raise 5 billion euros in 10-year debt while France will come to the market on Thursday, Mizuho noted.

Portugal is set to raise 4 billion euros for a new 10-year bond on Wednesday after receiving more than 24 billion euros in investor interest, one of the banks lead-managing the sale said in an email seen by Reuters.

Ireland began the syndicated sale of a new 2035 bond on Wednesday, which a source said could raise around 3 billion euros.. Order books on that deal have exceeded 17 billion euros, according to a lead manager.

They follow Slovenia, which raised 1.5 billion euros via a 10-year bond on Tuesday.

"Given the strength of rates in the current risk-off environment, the market shouldnt have too much problem taking down the (German) bond, though the large size might put it under some pressure given the other safe-haven supply coming in the week," Mizuho analysts said.

The 10-year German government bond yield was unchanged on the day at -0.284% after earlier falling to -0.299%. Yields in other core bond markets, such as in France, also recovered.

Italian yields were initially 1 to 2 basis points lower across maturities before trading flat on the session.

Official euro zone data published on Wednesday showed the economic mood in the region had improved in December, buoyed by optimism in Italy and Spain.

Euro zone economic data have been improving in recent weeks, which has helped lift euro zone yields, many of which remain stuck in negative territory. Offsetting that has been the geopolitical tensions in the United States.

The 10-year German yield had gained to as high as -0.157% on Jan. 2, a seven-month high, before the U.S. killing of the Iranian commander.

Investors will also be eyeing ADP National Employment numbers in the United States due later.

(Reporting by Tommy Reggiori Wilkes Editing by Gareth Jones)