German yield at record low, euro sinks as Draghi rekindles policy easing bets

LONDON, June 18 (Reuters) - The euro dropped and German government bond yields hit a new record low on Tuesday after European Central Bank chief Mario Draghi said the bank will provide more stimulus if inflation doesn't pick up.

The euro zone's central bank will need to ease policy again, possibly through new rate cuts or asset purchases, if inflation doesn't head back to its target, Draghi told the ECB's annual conference in Sintra, Portugal.

Germany's 10-year government bond yield, the benchmark for the bloc, dropped to a new record low of minus 0.274% after the remarks, while other euro zone bond yields were lower by 3-5 basis points.

"The very fact that some ECB board members are considering rate cuts should be seen as a wake-up call," said Marc-André Fongern, a strategist at MAF Global Forex in Frankfurt.

"Given the multitude of risks to the economy, this signifies a fundamental change in communication."

The euro weakened across the board after ECB's Draghi comments. It erased earlier gains against the dollar and dived to a 1-1/2 week low versus the perceived safe-haven Swiss franc.

The main euro zone stocks index trimmed early losses as the euro fell. It was trading down just 0.1% by 0812 GMT as the fall in the single currency translated into a boost for euro zone exporters. (Reporting by the London Markets Team; Writing by Abhinav Ramnarayan; Editing by Saikat Chatterjee and Catherine Evans)