EURO GOVT-Two-year German yields hit 4-mth low on ECB rate bets
* Schatz yield hits lowest since August * Expectations rise of ECB deposit rate cut * More recent peripheral weakness considered a correction By Ana Nicolaci da Costa and Marius Zaharia LONDON, Dec 7 (Reuters) - German two-year bond yields dipped to four-month lows on Friday on bets the European Central Bank could cut interest rates further, reinforced by gloomy growth forecasts for the euro zone's largest economy. Germany's Bundesbank slashed its growth outlook for next year to 0.4 percent, down from a June forecast of 1.6 percent. The move comes a day after the European Central Bank also cut its growth estimates for 2013 and its president Mario Draghi said the bank discussed negative deposit rates. Some money market rates turned negative in a sign that investors saw a deposit rate cut as more likely than previously. A negative rate would penalize banks for depositing money with the ECB and, policymakers hope, force them to put their money to work elsewhere. Two-year German yields fell as low as minus 0.084 percent, their lowest since August and meaning investors buying the assets are paying for the privilege of parking their money in a safe haven. "They (the ECB) wanted to open the door for a rate cut," said Marius Daheim, chief strategist at Bayerische Landesbank. "We've seen two-year yields at minus 0.1 percent earlier this year. I guess they can fall to that level again but we speak to clients and we ask whether they would buy German debt at negative yields and most of them say they wouldn't." Ten-year German yields were flat at 1.30 percent and German Bunds settled little changed on the day as a better-than-expected American jobs report for November capped the upside for safe-haven bonds.. Nonfarm employment increased by 146,000 jobs last month, the Labor Department said on Friday, defying expectations of a sharp pull back related to superstorm Sandy. PERIPHERAL ADJUSTMENT The prospect of central bank support has led to a sharp drop in Italian and Spanish yields in recent months, even though neither country has asked for aid - the prerequisite for ECB bond-buying. This week investors used a disappointing Spanish auction and political tension in Italy as an excuse to take profit on that bond rally. Some analysts did not expect this to be the beginning of a sharp sell-off.. Silvio Berlusconi's centre-right People of Freedom party pledged on Friday not to trigger a disorderly crisis that could alarm financial markets, after the party's withdrawal of support from Prime Minister Mario Monti put pressure on Italian debt. "It was quite easy to get a little bit of a correction after the massive rally that we've had in the last month. So I think it's just a pull-back in a bullish market and it's a buying opportunity at this stage," David Keeble, global head of fixed income strategy, at Credit Agricole said. Ten-year Italian yields were down slightly at 4.53 percent, while Spanish borrowing costs over ten years were flat at 5.48 percent in late European trading. "We want to be in the periphery - but not huge. We think there is going to be a little bit of a risk-on trade next year once you get the fiscal thing sorted in the U.S.," Keeble added. "You want to be in the short end, and you want to be in the periphery." U.S. budget talks aimed at reaching a deal to avert spending cuts and tax increases to be triggered early next year continued..