UPDATE 2-Euro zone yields drop after Brexit cliff-edge fears return

* Brexit, trade concerns cause yields to weaken

* Most bond yields down 1-2 bps; Gilt yields fall further

* Euro zone periphery govt bond yields: (Adds details, latest yields)

LONDON, Dec 17 (Reuters) - Euro zone bond yields fell on Tuesday, as the British government signalled it was ready to set up a Brexit cliff-edge in talks on a trade deal with Brussels, while a final agreement on the first phase of a Sino-U.S. trade deal had yet to emerge.

British Prime Minister Boris Johnson, who was re-elected last week, said he would use his control of parliament to outlaw any extension to the transition period following the country’s expected exit from the European Union on Jan. 31.

The implied uncertainty ahead may be providing some support for safe-haven government bonds, said DZ Bank rates strategist Andy Cossor, although he added that the end-2020 cut-off for a British trade deal with the EU was still a long way off.

Most 10-year euro zone bond yields were 1 to 2 basis points lower , with Germany’s 10-year yield at -0.285%, far off a six-month high of -0.217%.

British gilt yields fell further than elsewhere on the latest Brexit worries. The 10-year bond yield dropped 5 basis points to 0.777%.

There was also nervousness about just how firm a so-called phase one trade deal between the United States and China was.

The agreement between Washington and Beijing has been “absolutely completed”, a top White House adviser said on Monday, adding that U.S. exports to China would double under the agreement.

Under the deal announced last week, Washington will reduce some tariffs on Chinese imports in exchange for Chinese purchases of agricultural, manufactured and energy products increasing by about $200 billion over the next two years.

U.S. trade representative Robert Lighthizer said a signing date was being determined, while several Chinese officials told Reuters the wording of the agreement remained a delicate issue and care was needed to ensure expressions used in the text did not re-escalate tensions.

“Sometimes the devil is in the details so they may have a framework agreement but nailing down the last few details can be trickier than market participants expect,” said DZ Bank’s Cossor.

A number of ECB policymakers made dovish statements on Tuesday. Estonia’s central bank chief Madis Muller said some flexibility around the ECB’s inflation objective could be acceptable and it could even be targeted within a band.

Finland’s Olli Rehn said accommodative monetary policy would remain in place until inflation expectations return clearly close to 2% and an impact is visible on core inflation, which excludes the food and energy sectors.

It was a light calendar for euro zone data releases ahead of Wednesday’s influential German business sentiment Ifo survey.

U.S. manufacturing output in November data beat forecasts, as did homebuilding in data released on Tuesday, but the numbers did little to move markets. (Reporting by Yoruk Bahceli; Editing by Philippa Fletcher, David Clarke and Alex Richardson)