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* Bonds sell off as strong economy overshadows Brexit fears
* Germany 10-yr yield up 2 bps, lower-rated bonds outperform
* Fischer comments reassures investors on U.S. direction
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr
By Abhinav Ramnarayan
LONDON, March 29 (Reuters) - A strengthening euro zone economy gave investors confidence to continue selling euro zone government bonds on Wednesday, the day on which Britain is set to officially trigger divorce proceedings with the European Union.
In a sea change from fears that gripped the region on the day after last June's Brexit vote, high-rated euro zone government bond yields rose 1-2 basis points on Wednesday as investors eschewed "safe" assets and opted for riskier ones such as stocks.
Analysts cited a strengthening euro zone economy and a higher inflation expectations as the main cause for rising yields. Data this Friday is expected to show that consumer prices rose 1.8 percent in the euro zone in March, holding near the ECB's inflation target.
"A mixture of good data seems to be proving the European economy is doing quite well," said DZ Bank strategist Daniel Lenz, pointing in particular to a survey on private sector activity released on Friday.
Businesses across the euro zone marked the end of the first quarter by ramping up activity at the fastest pace in almost six years to meet burgeoning demand, a survey found on Friday.
This is the latest in a string of data releases that suggest returning growth and inflation in the euro zone, a very different picture from the one predicted by many when Britain voted to leave the EU in June last year.
On the day after the Brexit vote, German 10-year government bonds, the benchmark for the single currency bloc, saw the yield drop to a low of minus 0.17 percent.
It fell further in the days after as both Britain and Europe prepared for a period of profound uncertainty as to the political and economic repercussions of the loss of one of the trading bloc's five big economies.
Since then, the yield on Germany's 10-year bond has risen well over 50 basis points into positive territory and rose another 2 bps on Wednesday to hit 0.40 percent.
Other high-rated euro zone bond yields were also up 1-2 bps on the day, while lower-rated South European bonds outperformed the market, only edging slightly higher on the day.
The pan-European STOXX 600 index meanwhile was 0.2 percent higher in early trade.
Yields were also given an upward push after the U.S. Federal Reserve vice chair signalled that two more rate hikes are on the cards this year, soothing concerns that inflation and growth expectations in the world's richest country may have been overdone.
Stanley Fischer said on Tuesday that two more rate hikes this year "seems about right", pushing 10-year U.S. government bond yields higher.
"The possibility that all in all there could be three rate hikes this year could be a trigger for higher yields today as well," said DZ Bank's Lenz.
U.S. President Donald Trump's failure to push through a healthcare bill sparked concerns that he may struggle to go through with infrastructure spending promises, thereby potentially reducing expectations for growth and inflation in that country.
For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets
Reporting by Abhinav Ramnarayan; Editing by Alison Williams