(Updates at 1425 GMT after U.S. data)

By Harry Robertson and Stefano Rebaudo

Sept 3 (Reuters) - Euro zone bond yields fell on Tuesday

as cautious investors moved out of stocks, with mixed U.S.

manufacturing survey data doing little to lift the downbeat

mood.

Germany's 10-year yield, the bloc's benchmark,

was last down 7 basis points (bps) at 2.268%, after hitting a

one-month high of 2.349% on Monday. Yields fall as prices rise,

and vice versa.

Closely watched U.S. survey data showed the slowdown in the

manufacturing sector eased in August, although the trend still

pointed to subdued activity.

"A significant concern is highlighted by the continued

decline in the new orders component," said Florian Ielpo, head

of macro at Lombard Odier Investment Managers.

"It appears that the markets had already anticipated the

downturn. Equity markets had shown declines prior to the release

while rates (bond yields) had declined."

The survey figures kicked off a busy week for U.S. economic

data which will culminate in the release of August employment

numbers on Friday.

Weaker than expected July jobs data helped spark a stock

market sell-off in early August as investors fretted about

flagging U.S. growth, although markets later recovered.

Analysts struggled to pinpoint a reason for the drop in bond

yields and fall in stocks on Tuesday, although some cited

nervousness ahead of the release of the jobs numbers on Friday.

Weak manufacturing data from China over the weekend

contributed to a drop in oil and metals prices.

The German 2-year yield, sensitive to

expectations for European Central Bank interest rates, was last

down 5 bps at 2.372%, within the range it has traded in since

early August.

The size and importance of the U.S. economy and dollar means

American data often influences European markets and expectations

for the European Central Bank.

Italy's 10-year bond yield fell 4 bps to 3.661%,

with the yield gap between Italian and German 10-year bonds

widening 2 bps to 139 bps, suggesting investors

were seeking out safer government debt.

German bond yields rose to a one-month high on Monday, and

euro area spreads tightened after the results of two German

regional state elections that dealt a blow to the ruling

coalition.

The Alternative for Germany (AfD) became the first far-right

party to win a regional election since World War Two.

In a letter to lawmakers, the French finance ministry said

the country could run a substantially bigger budget deficit than

expected.

The spread between French and German 10-year yields - a

gauge of risk premium investors demand to hold France's public

debt - was up 2 bps at 72 bps. It hit its highest since 2012 at

more than 85 bps during the French elections in June

.