REFILE-UPDATE 4-Euro zone bond yields fall as ECB elaborates new strategy

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* Italian 10-yr yields drop to lowest since April

* ECB meets for first time since policy tweak

* Market expects extended period of stimulus

LONDON, July 22 (Reuters) - Euro zone bond yields fell and Italian yields briefly touched their lowest in over three months on Thursday, after ECB President Christine Lagarde elaborated on a new target that will keep rates at record lows for longer.

The European Central Bank, in its first official policy statement since it tweaked its inflation target, pledged not to hike borrowing costs until it sees inflation reach its 2% target “well ahead of the end of its projection horizon and durably”.

The decision was the first since the ECB adopted a symmetrical inflation target earlier in July, implying that it may tolerate inflation moderately above target for a transitory period.

German 10-year bond yields, the benchmark for the bloc, fell nearly 3 basis points to -0.423% at the start of ECB chief Lagarde’s press conference, nearing their lowest since February. They later gave up much of that fall and the yield was down 1 basis point at -0.405% by 1408 GMT.

Italy’s 10-year bond yield fell as much as 5 bps to 0.638%, its the lowest since early April, before giving up some of the drop to last trade at around 0.67%. Its five-year yield meanwhile briefly turned negative for the first time since April. .

“There was some disappointment that there wasn’t more detail about the (Pandemic Emergency Purchase Programme), but the general perception is that the forward guidance was on the dovish side, which is why we see the market react this way,” said Daniel Lenz, rates strategist at DZ Bank.

Lagarde reiterated that “any particular exit” from the PEPP would be “absolutely premature”. She added that the Governing Council had not discussed conventional bond purchases, which many analysts expect will be expanded to compensate once the PEPP, which is due to expire in March 2022, is withdrawn.

“Also, the hint was the Delta variant will prevent the ECB from slowing the pace of purchases anytime soon,” DZ Bank’s Lenz said, referring to comments from Lagarde that the COVID-19 variant poses a risk to the euro zone’s economy.

The closely watched spread between Italian yields and German Bunds, the euro zone’s benchmark, narrowed and was last at 106 bps, still a distance from July’s low of 98.72 bps.

After initially edging lower, the euro rose 0.3% to the day’s high of $1.1831 as traders who had positioned for a weaker currency took profits when the meeting’s dovish tone was in line with expectations.

“The forward guidance is a bit more dovish and allows for more easy policy. The recalibration is about the duration of support rather than the size of the support,” said Piet Haines Christiansen, chief strategist at Danske Bank.

“This is more aligned to the new strategy outcome rather than a new policy signal,” he said, adding that the wording on bond buying was unchanged.

The euro remains close to 3-1/2 month lows versus the dollar and the moves on Thursday were contained, with investors saying the currency would remain under pressure given the ECB’s pledge to keep rates lower for longer. Euro zone bank stocks initially ticked higher but gradually erased their gains and were trading down about 0.2% on the day at 1406 GMT. (Reporting by Abhinav Ramnarayan and Yoruk Bahceli; additional reporting by Dhara Ranasinghe, Tommy Reggiori Wilkes and Julien Ponthus; Editing by Catherine Evans)