Euro zone bond yields fall after upbeat economic data, despite hefty week of new issuance

* German 10-year bond yield drops to 0.41 percent

* Portugal 10-year bond yield drops to 1.86 pct

* First (Other OTC: FSTC - news) full trading week of 2018

* Euro zone business climate index hits highest since 1985

* Euro zone periphery govt bond yields http://tmsnrt.rs/2ii2Bqr (Rewrites throughout, adds quotes, updates prices)

By Dhara Ranasinghe

LONDON, Jan 8 (Reuters) - Borrowing costs in the euro area fell on Monday ahead of a heavy week of new bond supply across the bloc in the first full trading week of the year.

Peripheral bond markets led the fall in yields after another wave of upbeat data helped bolster sentiment towards European assets.

Germany, Austria, the Netherlands and Italy are together expected to sell almost 12 billion euros of bonds this week, while strategists say Portugal could also come to the market with a syndicated bond deal.

"Supply is a strong factor this week," said DZ Bank rates strategist Sebastian Fellechner. "We think Portugal will announce a new 10-year benchmark this week."

While new bond supply tends to put upward pressure on bond yields, analysts said data showing further signs of strength in the euro zone economy had probably helped sentiment, especially towards peripheral bond markets.

European Commission data on Monday showed the euro zone business climate index hit its highest since 1985. Euro zone retail sales rose a higher-than-expected 2.8 percent year-on-year in November.

Outperforming its peripheral peers, Portugal dropped 6 basis points on Monday to 1.86 percent, before inching back to 1.88 percent in later trading.

"The Portugal debt market only requires a little bit of liquidity to move," ING senior rates strategist Martin van Vliet said.

Most euro zone 10-year bond yields were down 1-3 bps.

The other strong performer was Germany's 10-year government bond, the benchmark for the region, which dropped to 0.41 percent on Monday.

ING's van Vliet said the fall in the 10-year Bund yield was probably due to "fresh money at the beginning of 2018 that needs to be invested" and to "possible spillovers and hedging flows related to the issuance".

The European Central Bank should set a date to end its asset-buying programme, the head of Germany's Bundesbank, Jens Weidmann, told Spanish newspaper El Mundo.

In recent weeks, hawkish comments from a few ECB policymakers have stoked speculation that the ECB's bond-buying stimulus may well end sooner than expected.

Data on Friday showed inflation in the euro area at 1.4 percent year-on-year in December, well below the ECB's near 2 percent target. The core measure of inflation, which strips out food and energy prices, was 1.1 percent.

The ECB has pledged to continue buying bonds at least until September. But with economic growth in the euro zone on its best run in a decade and inflation comfortably above 1 percent, it is widely expected to wind down the programme after that.

(Reporting by Dhara Ranasinghe, Additional Reporting by Fanny Potkin; Editing by Catherine Evans)