EURO GOVT-Two-yr yields mark new lows with rate cuts eyed

* Schatz yield hits new 3-yr low as rate cuts eyed

* UK and US inflation ease at record rate

* Three-month dollar Libor rates resume easing

* Greek debt auction meets with strong demand

By Kirsten Donovan

LONDON, Nov 18 (Reuters) - Short-dated euro zone government bonds marked new three-year lows on Tuesday on firming expectations for further interest rate cuts as investors fretted over an accelerating global slowdown.

Bunds remained well bid through most of the session as the flow of grim news continued with major world banks showing renewed strain from the economic crisis on Tuesday [ID:nLI346084].

However, a late equity rally took some of the shine off the market, with yields ending the day little changed.

Two-year yields EU2YT=RR fell as far as 2.128 percent, and were last at flat on the day at 2.185 percent, while 10-year Bund yields EU10YT=RR were again testing the key 3.65 percent area at 3.654 percent.

The two-year yield has fallen more than 100 basis points over the past month, leaving it close to a historic low just above 2.00 percent plumbed in June 2005.

"It's still the front-end that's marking new lows, the 10-year is finding the 3.65 percent barrier a struggle to get through," said Calyon rate strategist David Keeble.

"But the steepening trade is still very much in vogue and likely to remain so for now. The world isn't changing very rapidly, it's sliding into a hole and will stay there for a few more months."

The 2-10-year yield curve remained close to its steepest in 4-years at around 146 basis points.

Meanwhile, the Bund future FGBLc1 hit its highest since early 1996 at 119.03 on a continuous contract basis and was last flat on the day at 118.75.

The 10-year swap spread widened further to around 58 basis points as bonds outperformed rates, in contrast to the U.S. where the equivalent spread is narrowing.