(Updates at 1032 GMT)

By Samuel Indyk

LONDON, July 16 (Reuters) - Euro zone government bond

yields fell for a second day on Tuesday as investors looked

ahead to Thursday's European Central Bank policy announcement

with data hinting at a further slowdown in Germany, Europe's

largest economy.

Germany's 10-year bond yield, the euro

area's benchmark, was last down 3.5 basis points (bps) at

2.437%. It fell 2.5 bps on Monday.

German

investor morale worsened

more than expected in July, the ZEW economic research

institute said on Tuesday, underlining concerns about the

economic recovery in Germany.

The decline in morale was attributed to a fall in

exports, political uncertainty and a lack of clarity about the

ECB's policy outlook, ZEW said.

The central bank announces policy on Thursday this week

and is widely expected to hold interest rates steady, while the

outlook for future rate cuts will depend on how the economy

evolves.

"I think they will say they are data dependent, meaning

that they can cut in September, but I don't think they will

indicate that is the way they will lean unless data supports

it," said Anders Svendsen, chief analyst at Nordea.

The futures market attaches less than a 10% chance of a

move at Thursday's meeting and around an 85% chance of a

quarter-point cut in September, LSEG data showed.

Germany's policy-sensitive two-year yield was

last down 4 bps at 2.752%, its lowest level since June 21.

POLITICS KEEPS MARKETS GUESSING

Investors were also still assessing what the

attempted assassination

of U.S. presidential candidate Donald Trump might mean for

financial markets.

Markets were betting that Trump's chances of winning

might be greater and that his policies could reignite inflation

in the U.S. and increase the deficit.

The benchmark U.S. 10-year yield, which had

risen on Monday, was down 5 basis points on Tuesday, reversing

all of the prior day's gain. It was last at 4.183%.

"There doesn't seem to be a long-lasting impact (from

the assassination attempt) for the market right now," said

Sophia Oertmann, analyst at DZ Bank.

"Markets had already raised their chances of a Trump

victory after the TV debate. The market was already going in

that direction."

France also remains in focus for investors with French

President

Emmanuel Macron

likely to accept the resignation of his current government

to enable elected lawmakers to sit in parliament when it

convenes on Thursday.

France's 10-year yield was last down 3 bps

at 3.084%, its lowest level since June 7, the last trading day

before Macron called the snap election on June 9.

The yield gap between French and German 10-year bonds

stood at 65 bps, around 15 bps wider than where it

was before June 9.

That gap is a closely watched measure of risk and surged

to 85 bps in late June, its widest since the peak of the euro

zone crisis in 2012.

"I don't expect the spread to change much from this

current level of 65 bps because the uncertainty will not go away

any time soon," DZ Bank's Oertmann said.

"Even if we get a new government or cooperation, it will

be hard for a new government to realise important reforms,"

Oertmann added.