* Euro zone periphery govt bond yields http://tmsnrt.rs/2ii2Bqr (Updates throughout, adds payrolls data, quotes)
LONDON, Feb 7 (Reuters) - Euro zone bond yields fell on Friday after data showing German industrial output in December suffered its biggest fall since January 2009 fanned concerns about the economic outlook for the bloc's biggest economy.
While bond yields across the region have risen this week, in part because of a sense that the outbreak of coronavirus could be contained, a sense of caution returned as the weekend approached -- encouraging investors back to safe-haven assets.
German industrial production tumbled by 3.5% on the month, undershooting expectations for a 0.2% fall, in the biggest drop since January 2009.
Data from France meanwhile showed French industrial production fell much more sharply than expected in December as factories contended with nationwide transport strikes and a broader European slowdown.
"Industrial production figures from Germany and France were shockingly poor," analysts at Daiwa said in a note.
"The German data significantly raise the probability that the GDP report due a week today will... show a contraction in the fourth quarter."
Germany's benchmark 10-year Bund yield fell to as low as -0.368%, before rising slightly in late trade following a report that raised the prospect of fiscal stimulus in the euro area.
Euro zone finance ministers are set to agree this month a more growth-friendly fiscal policy, three EU officials said, a change from current targets that would pave the way for more spending in Germany amid fears of a downturn.
Across the euro area, 10-year bond yields were down 1-2 bps in late trade but off their lows.
Still German government bonds are set for their worst week since early December with 10-year yields up just over 6 bps this week as Chinese authorities stepped up measures to relieve pressure on its economy from the coronavirus outbreak.
China's economic activity is expected to recover once the virus is brought under control, a deputy governor of the country's central bank said on Friday.
Caution heading into the weekend overshadowed a strong U.S. jobs report, analysts said.
U.S. job growth accelerated in January, with nonfarm payrolls rising by 225,000 jobs.
"The fact that we've had better than expected U.S. jobs data has not changed the mood in bond markets," said UniCredit strategist Luca Cazzulani.
"It could be that investors are a bit cautious again, especially ahead of weekend."
Greek government bonds were the clear out-performer, with the 10-year yield down 8 bps to 1.06%, after hitting record lows on Thursday on optimism after the euro zone bailout fund waived a compulsory payment due from Cyprus.
Later Fitch is scheduled to publish its review of Italy's credit rating, which stands two notches above junk at BBB, with a negative outlook. Analysts expect the review to be a non-event. (Reporting by Yoruk Bahceli and Dhara Ranasinghe, editing by Chizu Nomiyama)