* German two-year yields highest since late Jan
* Fed signals balance sheet cuts despite weak data
* BOE closest to voting for hike since 2007
* Greece aid on the line as Eurogroup meets
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates prices, milestones)
By Abhinav Ramnarayan and John Geddie
LONDON, June 15 (Reuters) - The prospect of tighter monetary policy in the United States and Britain despite uncertainties over their economic health reverberated across euro zone bond markets on Thursday, sending short-dated German yields to their highest since January.
While the interest rate hike from the U.S. Federal Reserve was widely expected on Wednesday, policymakers gave markets a reality check by signalling it would begin selling assets accumulated over years of money-printing.
Euro zone government bond yields followed the overnight rise in U.S. equivalents when trading opened on Thursday, a move that accelerated after the Bank of England came closest to voting for a rate hike since 2007.
Three of its policymakers backed a hike even though the economy is showing signs of a slowdown caused by the uncertainty of Britain’s impending departure from the European Union.
British 10-year bond yields rose as much as 10 basis points on the day, while German equivalents jumped 7 basis points to a two-week high of 0.298 percent.
Other euro zone 10-year yields were up around 3-7 basis points on the day.
The moves were more extreme in shorter-dated bonds which tend to be more sensitive to immediate policy changes.
Two-year German yields rose to their highest level since late January at minus 0.632 percent. Five-year yields shot up 9 bps -- the biggest daily jump in almost two months.
“It seems like there is a bit of a struggle going on among central banks, with two major ones trying to sound hawkish,” said Nordea chief strategist Jan von Gerich.
“You could argue that both the Fed and the BoE could have sounded more dovish but were not.”
For its part, the European Central Bank last week said it had not discussed scaling back its stimulus programme and lowered its inflation forecasts suggesting it was in no rush to tighten financial conditions.
Large bond auctions by Spain and France put further selling pressure on government bonds as investors made room for the new supply.
Any action by major central banks such as the U.S. or the UK tends to reverberate across the debt markets of developed countries, as many investors have European, U.S. and Japanese government bonds in their portfolio and switch between them when there are changes in yields.
The Fed’s move had been more surprising as it came directly after inflation and retail sales data in the United States that had pushed U.S. yields to a seven-month low and nudged other benchmarks down.
In Europe, Germany’s 10-year yield hit a seven-week low of 0.225 percent on Wednesday, before it snapped back sharply after the Fed.
“The Fed has taken a cautious approach to balance sheet normalisation, but they have begun it and it’s definitely a tightening of policy,” said ING strategist Martin van Vliet.
“The meeting was definitely tilted towards the hawkish side.”
Greek government bond yields were a touch higher as its international lenders prepared on Thursday to unblock as much as 8.5 billion euros in loans that Athens desperately needs next month to pay its bills, and to give some idea of what debt relief they may offer over the long-term.
The chairman of euro zone finance ministers Jeroen Dijsselbloem told reporters the size of the payment to Athens would be discussed during the meeting, since lenders agreed that Greece had pushed through all the requested reforms.
For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets
Additional reporting by Dhara Ranasinghe; Editing by Pritha Sarkar and Keith Weir