Updates with later market movements

By Harry Robertson and Stefano Rebaudo

April 7 (Reuters) - Euro zone bond yields rose in volatile late European trading on Monday as markets digested headlines on tariff negotiations and investors wait to see whether U.S. President Donald Trump will budge on his sweeping tariffs.

European yields had fallen sharply in early trading as investors ditched stocks and moved into safe-haven assets such as government bonds, the Japanese yen and Swiss franc, while ramping up bets on rate cuts.

Throughout the day yields then rose as stocks retraced some of their losses, after officials said the European Union was not immediately retaliating and was willing to negotiate with the United States on the tariffs.

Yields shot higher towards the end of trading in Europe after a report said a Trump adviser had said the President may be considering a pause in tariffs. They then fell back slightly when the White House called that report "fake news".

Germany's 10-year bond yield DE10YT=RR was last up 4 basis points (bps) at 2.657% after earlier falling to 2.479%, its lowest since March 4. Yields move inversely to prices.

European Commission President Ursula von der Leyen told a press conference in Brussels that the EU stood ready to negotiate a "zero-for-zero" tariff pact for industrial goods, while other officials made similar comments throughout the day.

"The key message that we're just learning right now is that the EU is not retaliating right away, that they're trying to calm the tensions a bit," said Michael Weidner, co-head of global fixed income at Lazard Asset Management.

"And I think that's a very wise move, because nobody is set to profit from a further escalation."

German 2-year government bond yield DE2YT=RR, which is sensitive to expectations for European Central Bank policy rates, was last down 6 basis points (bps) at 1.801%.

Earlier in the session it dropped sharply to 1.665%, its lowest level since early October 2022, as investors moved to price in deep rate cuts from the ECB.

Money markets priced in an ECB deposit rate at 1.7% in December EURESTECBM6X7=ICAP, pointing to 80 bps of rate cuts, compared to 1.9% last week before Trump announced U.S. tariffs.

They also discounted a roughly 90% chance of a 25 bps cut next week.

Italian government bonds underperformed their peers in the euro area as investors perceive them as carrying higher risk.

Italy's 10-year yield IT10YT=RR rose 10 bps to 3.865%. The yield gap between BTPs and Bunds DE10IT10=RR - a gauge of risk premium investors ask to hold Italian debt - reached 126 bps, its highest since November 27, and closed at 117 bps.

(Reporting by Harry Robertson and Stefano Rebaudo
Editing by Alexandra Hudson, Joe Bavier, Peter Graff)

((harry.robertson@thomsonreuters.com; stefano.rebaudo@tr.com))