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UPDATE 2-German 2-yr yields hit one-month low as euro zone services sector stalls

* German 2-year yields hit lowest since August 8

* Euro zone PMI shows services industry growth slowing

* France due to auction long-dated debt

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates prices, adds details)

LONDON, Sept 3 (Reuters) - Short-dated German bond yields dropped to their lowest level in nearly a month on Thursday as a survey showed the euro zone’s rebound from its deepest downturn on record faltered in August.

Growth in the bloc’s dominant service industry almost ground to a halt, suggesting the long road to recovery will be bumpy.

With oil prices dropping 2% on Wednesday and weak retail sales from Germany and private payrolls data from the United States undershooting expectations, investors retreated to the safety of government bonds.

“It’s a weird situation where we see equities continue to perform at all-time highs, but we also have the unresolved COVID-19 situation fuelling demand for government bonds,” said DZ Bank rates strategist Christian Lenk.

“Concern over Covid-19 and support from central banks are also keeping yields low,” he added.

Germany’s two-year bond yield dropped as much as three basis points to -0.718%, its lowest level since Aug. 8, while 10-year Bund yields hit 1-1/2 week lows .

“In a follow-up to yesterday’s rally, the market remains on a strong footing,” said Commerzbank strategist Rainer Guntermann, adding that focus was on recent comments from the ECB expressing concern around the strength of the euro, which might hint at easier monetary policy.

French yields were also lower after a strong set of auctions saw the country’s debt agency raise 10.5 billion euros in an auction that included 30-year and 40-year bonds. While demand for the short-dated portion was particularly strong, the number of bids that came in for the longer-dated debt was also healthy.

With Germany recording strong demand for its inaugural 10-year Green bond on Wednesday, appetite for government debt appears extremely strong at the moment.

Italy’s 10-year yield briefly fell below 1% for the first time in 1-1/2 weeks, then rose later. It was up about 2 basis points on the day to 1.05% in late trade.

Final readings of IHS Markit’s purchasing managers’ indexes (PMI) for the services sectors of France and Germany also showed a slight easing of the recovery.

France said on Thursday it plans to spend 100 billion euros ($118 billion) to pull its economy out of the slump. The stimulus equates to 4% of gross domestic product, meaning France is ploughing more public cash into its economy than any other big European country as a percentage of GDP. (Reporting by Abhinav Ramnarayan, additional reporting by Yoruk Bahceli; Editing by Toby Chopra, Hugh Lawson and Andrew Heavens)

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