LONDON, July 12 (Reuters) - Euro zone bond yields rose on Friday but were on track for a weekly fall after a sharp drop the previous day on the back of weaker-than-expected U.S. inflation data.

German 10-year bond yield, the benchmark for the euro zone, rose 4 basis points (bps) to 2.511%, but was on track to end the week around 2 bps lower after dropping 7 bps on Thursday. Yields move inversely to prices.

Investors on Friday were waiting for U.S. producer price index (PPI) inflation data, after consumer inflation figures on Thursday showed prices fell 0.1% month-on-month in June. The data caused U.S. and euro zone yields to tumble, particularly on short-dated bonds that are more sensitive to central bank rate expectations.

"The slowdown in U.S. inflationary pressures in June has been broad-based, raising hopes that today's PPI release will provide further evidence that the Fed's preferred measure, the PCE (personal consumption expenditures index)... has fallen back close to target," said Christoph Rieger, head of rates and credit research at Commerzbank.

Germany's two-year bond yield was 3 bps higher at 2.83% after dropping 10 bps the previous day.

Given the size of the U.S. economy and importance of the dollar, U.S. economic data and changes in expectations about Federal Reserve policy tend to move markets around the world.

France's 10-year bond yield, which has been in focus after Sunday's election resulted in a hung parliament, rose 4 bps to 3.171% but was on track to finish the week 4 bps lower.

The spread between French and German borrowing costs was steady at 65 bps.

Italy's 10-year yield was also up 4 bps at 3.814%, and the gap between Italian and German bond yields stood at 131 bps.

The European Central Bank will meet to set interest rates next week, although traders think another rate cut after June's reduction is highly unlikely.

"Recent data and ECB speak suggest that the risk of a cut at the July meeting is close to zero - a hold is pretty much guaranteed," TD Securities strategists said in a note on Friday.

"Focus will be on whether President (Christine) Lagarde opens up the door more explicitly to a cut at the September meeting."

(Reporting by Harry Robertson; Editing by Kim Coghill and Toby Chopra)