Tepid growth sends investors scurrying back to German Bunds

* German manufacturing contracts for fourth month

* Survey shows tepid euro zone growth in April

* German Bund yields drop over 6 bps to 0.02 pct

* Euro zone periphery govt bond yields http://tmsnrt.rs/2ii2Bqr (Updates pricing, adds quotes)

By Abhinav Ramnarayan

LONDON, April 18 (Reuters) - Euro zone government bond yields were on track for their biggest one-day decline in three weeks after a business survey painted a bleak picture for German manufacturing, fuelling worries about the euro zone economy.

Activity in Germany's services rose to a seven-month high in April, a survey showed on Thursday. Investors focused instead on the 44.5 reading for manufacturing, below the 50.0 mark separating growth from contraction but better than the 44.1 recorded last month.

In addition, data for the bloc overall showed growth slowing as demand barely rose despite smaller price increases. European stocks and the euro fell as investors retreated to euro zone government bonds, German Bunds in particular.

"We've been in this situation for some time where people are hoping for better numbers, and Chinese GDP certainly seemed to point that way. But today's numbers are on the other end of the spectrum," said ING strategist Benjamin Schroeder.

German 10-year bond yields, the benchmark for the euro zone, had risen as high as 0.10 percent earlier this week on optimism a corner was being turned. Thursday's data sent it sliding back down towards zero.

By afternoon, yields were down six basis points at 0.022 percent, its lowest in a week Other yields were 4 to 6 bps lower.

U.S. Treasuries had fallen 4 bps in late trade to 2.55 percent.

"The reading was better than last month but below expectations, and we could see from the market report that once again it's the core industry for Germany that's the worry - the carmakers are struggling," said DZ Bank analyst Sebastian Fellechner.

Antoine Bouvet, rates strategist at Mizuho, said that the large reaction in euro zone bond yields suggested market expectations of an economic rebound or stabilisation had built up too much.

"They have been seriously challenged as far as the euro zone is concerned," he said.

The euro zone stocks index and Germany's DAX fell to their lowest for the day after the German data, which followed a weaker-than-expected French manufacturing PMI reading.

Investors were hoping to see signs of stabilisation in the business survey that would ease pressure on the European Central Bank, which is looking for ways to boost growth and inflation.

Sources told Reuters this week that several ECB policymakers think the bank's economic projections are too optimistic as growth weakness in China and trade tensions linger. (Reporting by Abhinav Ramnarayan; additional reporting by Virginia Furness; editing by Larry King)