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UPDATE 2-Euro zone yields extend fall, BTPs hit six month low

* Euro zone periphery government bond yields (Updates prices)

AMSTERDAM/MILAN, Sept 17 (Reuters) - Euro zone government bond yields dipped on Thursday with those on Italian BTPs hitting their lowest since early March as the Bank of England (BoE) mentioning negative interest rates added to expectations of lower for longer rates in the U.S..

The BoE said it was looking more closely at how it might cut interest rates below zero as Britain’s economy faces a triple whammy of rising COVID-19 cases, higher unemployment and a possible new Brexit shock.

“Two things are affecting the market this afternoon. Poor U.S. housing data and the Bank of England indicating the possibility of rates below zero which triggered a rally in Gilts supporting euro zone government bonds,” Antoine Bouvet, senior rate strategist at ING said.

The UK 10-year Gilt yield fell to its lowest level since August 11 at 0.158% after Bank of England governor Andrew Bailey’s news conference.

U.S. homebuilding fell in August after strong gains in the prior three months.

German 10-year yields were last down 2.4 basis points at -0.502% after hitting a 3-1/2 week low of -0.51%.

The U.S. Federal Reserve on Wednesday promised to keep rates near zero until inflation is on track to “modestly exceed” its 2% target.

“I think that that really shows the big point is the Fed is going to stick to its... rate policy until the end of 2023,” said DZ Bank rates strategist Christian Lenk.

The Italian 10-year BTP yield fell as low as 0.946% and was last down 2.5 basis points at 0.948%%.

“The outcome of the FOMC meeting is neutral for European credit. However, a low-for-longer interest-rate picture remains supportive of hunt for yield,” a Unicredit research note said.

Focus remained on central banks after a chorus of dovish ECB speakers nuanced the bank’s unexpectedly sanguine policy message last week that took markets by surprise given the bloc’s negative inflation reading in August and the appreciation of the euro.

Piet Christiansen, chief strategist at Danske Bank, said it was important to note that statements so far have come from dovish policymakers, and are unlikely to represent the view of the governing council as a whole.

Elsewhere, the three-month euribor interbank rate fell to a new record low of -0.501% . Money market rates have fallen sharply as cheap ECB loans mean banks have little need to borrow from one another.

In the primary market, France raised 9.743 billion euros from an auction of conventional and inflation-linked bonds and Spain raised 4.23 billion euros from short- and long-dated bonds.

Germany plans to take on new debt of around 100 billion euros next year to sustain coronavirus stimulus, an increase from the 80 billion initially eyed.

Reporting by Yoruk Bahceli and Stefano Rebaudo; Editing by Kevin Liffey and Chizu Nomiyama, Kirsten Donovan