UPDATE 2-Euro zone bond yields drop after record TLTRO take-up

* Euro zone periphery govt bond yields (Rewrites headline and throughout to reflect move in prices)

AMSTERDAM, June 18 (Reuters) - Euro zone bond yields dropped across the board on Thursday as the ECB announced record take-up of its new round of cheap loans, a form of stimulus that is expected to support the bond market.

Euro zone banks borrowed a record 1.31 trillion euros from the European Central Bank.

It was the first tender for these loans since the ECB decided to offer banks even more generous funding conditions in April - three-year loans for as low as minus 1%.

Banks often take up cheap loans and invest the money in “carry trades”, buying government bonds, particularly in Southern Europe where yields are higher.

Yields on benchmark 10-year Spanish and Portuguese government bonds fell around 5 basis points, hitting their lowest level since late March in the case of Spain.

Italian yields also dipped after the result, with 10-year yields again falling to their lowest since late March at 1.33%. They were last down 4 basis points at 1.34%.

Other benchmark euro zone bond yields such as those of Germany and France were lower 2-4 bps.,

BTPs “are the most obvious place for people to park excess cash,” said Seamus Mac Gorain, head of global rates at JP Morgan Asset Management.

“But if you’re borrowing at minus 1%, then really any short-dated assets offer pick-up.”

Nordea analysts said they also expect demand for the loans to support semi-core government bonds such as those from Belgium -- which have relatively high ratings but offer a yield pick-up over Germany, as well as a fall in the level of inter-bank lending rates ESTR, six and 12-month Euribor.

A hefty amount of supply was on offer Thursday, with Spain selling 5.88 billion euros and France selling 11 billion euros of conventional bonds and a 2.43 billion euro inflation-linked bond via auction.

Bonds showed little reaction to news that France hopes to reach an agreement on the European Union’s proposed 750 billion euro recovery fund in July, according to a presidential adviser. But he also said differences remained over whether countries like Italy should receive loans or grants.

The news comes ahead of a video conference between EU leaders on Friday that investors will be watching closely. (Reporting by Yoruk Bahceli; Editing by Toby Chopra and Chizu Nomiyama, Kirsten Donovan)