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Euro zone bonds hold steady as investors await inflation data

* German bond yields near three-month lows

* Weaker core inflation reading could extend rally

* Euro zone periphery govt bond yields

By Tommy Wilkes

LONDON, Nov 30 (Reuters) - Euro zone government bonds were little moved on Friday as investors prepared for inflation data, while Italian bond yields steadied after falling heavily this week on expectations of a compromise with the European Union over Rome's budget.

Euro zone inflation for November, due at 1000 GMT, is expected to come in at 2 percent, according to a Reuters poll of economists, against 2.2. percent in the previous month.

Data showing slightly slowing inflation in Germany and a fall in U.S. Treasury yields on Thursday had fuelled a rally in core euro zone government bonds, as investors bet the European Central Bank could be forced to keep interest rates at record lows for longer because of economic headwinds.

Major euro zone government borrowing costs dipped to their lowest levels in three months on Thursday on comments by Federal Reserve Chairman Jerome Powell that many investors saw as a sign the U.S. Fed's tightening cycle was drawing to a close.

"A drop in euro zone inflation is already in the price (of euro zone core bonds)," said Antoine Bouvet, a strategist at Mizuho. "But if we see a drop in core inflation, we could see lower interest rates."

Commerzbank (Xetra: CBK100 - news) analysts said a lower core inflation reading could lead to more repricing, given signs of a shift in the broader macro-economic environment, with rate expectations being dialled back.

"With (Other OTC: WWTH - news) headline risks elevated as the G20 summit gets going, volatility is assured, and we suggest buying Bunds into dips," they wrote in a note to clients.

The 10-year German government bond was unchanged at 0.322 , as was the 5-year bond at -0.261 percent .

Other core euro zone bond markets in France and Austria also began Friday's session quietly.

In Italy, yields were largely flat on the day but held on to the strong gains notched up this week.

A report in the Il Messaggero daily said on Friday that Italy's Prime Minister Giuseppe Conte and Treasury Minister Giovanni Tria are working on a proposal to cut the 2019 deficit target to reach a deal with the European Union.

Italy 's government has been targeting a deficit of 2.4 percent of gross domestic product in 2019, putting it on a collision course with Brussels.

"It's encouraging that there are signs some members of the government are pushing for a 2 percent deficit target," said Bouvet (LSE: 0HDU.L - news) at Mizuho, predicting a rally in Italian BTPs into the year-end so long as there are no more adverse headlines.

The Italian 10-year bond yield rose 1 basis point to 3.213 , while the 5-year was unchanged at 2.331 percent. (Reporting by Tommy Reggiori Wilkes Editing by David Holmes)