Wires

UPDATE 2-Euro zone bond yields at one-week highs as U.S.-Iran fears abate

Dhara Ranasinghe

* Bond yields rise to 1-week highs

* Geopolitical worries abate for now

* BoE's Carney delivers rate-cut hint

* Euro zone periphery govt bond yields http://tmsnrt.rs/2ii2Bqr (Updates prices)

LONDON, Jan 9 (Reuters) - Government borrowing costs across the euro zone rose to one-week highs on Thursday, as a growing sense that tensions between the United States and Iran were unlikely to escalate returned investor focus to hefty new supply and the economic outlook.

U.S. President Donald Trump on Wednesday tempered days of angry rhetoric and suggested Iran was "standing down" after it fired missiles at U.S. forces in Iraq, as both sides looked to defuse a crisis over the U.S. killing of an Iranian general.

"It would take a brave person to suggest that this is the last that weve heard of this geopolitical saga," Deutsche Bank strategist Jim Reid said.

"However, for now, there does appear to be comfort in the fact that any near-term re-escalation appears unlikely given the rhetoric over the last 24 hours from both sides."

Higher-rated euro zone bonds such as the German Bund, considered a refuge during times of uncertainty, have benefited from geopolitical tension in the Middle East.

But bonds had already started to give up price gains on Wednesday, pushing yields higher, as perceptions grew that a more serious conflict would be avoided.

Data showing the biggest increase to German industrial output in a year and a half in November on Thursday encouraged bond selling, as did the latest wave of new bond supply to hit markets this week.

The benchmark German Bund yield rose to a one-week high of -0.22%, up 4 basis points on the day.

Most other 10-year bond yields in the bloc were 3 bps higher, although Irish and Italian yields fell

Two-year British gilt yields were down almost 5 bps at 0.59% , retreating from one-week highs, after comments from Bank of England Governor Mark Carney suggested the central bank could cut interest rates if economic weakness persists.

France sold around 9.5 billion euros of long-dated bonds, while Spain auctioned 5.49 billion euros of bonds, adding to this week's heavy dosage of new debt issuance.

Ireland and Portugal sold long-dated bonds via a syndicate of banks on Wednesday in deals that saw strong investor demand.

"While Trump seems to be trying to somewhat defuse the situation (with Iran), we would remain cautious for the time being," said Peter McCallum, a rates strategist at Mizuho in London.

"Yet unless anything tangible takes place, theres the risk that this saga falls to the back of the markets mind and the onslaught of supply takes more of an effect on rates."

(Reporting by Dhara Ranasinghe, additional reporting by Yoruk Bahceli; Editing by Alison Williams, Kirsten Donovan)