Updates at 1530 GMT

By Stefano Rebaudo

Nov 29 (Reuters) - Euro zone long-dated government bond yields were on track for their fourth straight weekly fall on Friday as economic data showed a bleak outlook while a market gauge of inflation expectations dropped below 2%.

Inflation data from France and the euro zone came out in line with expectations, but was higher than expected in Italy.

Data on Thursday showed German annual inflation was flat in November despite expectations of a second consecutive increase.

The risk premium on French debt steadied as the government said it was ready to make concessions over the next budget amid growing concerns that opposition to the bill could topple Prime Minister Michel Barnier's administration.

Germany's 10-year yield DE10YT=RR, the benchmark for the euro area, was down 2 basis points (bp) at 2.107% and down 14.5 bps for the week.

Data recently showed that euro zone business activity took a surprisingly sharp turn for the worse this month while German business morale fell more than expected.

Markets have priced in a European Central Bank deposit facility rate of around 1.85% in July EURESTECBM6X7=ICAP. They are fully discounting a 25 bp rate cut at the ECB's December meeting and have reduced the chance of a 50 bp move to around 20% from over 50% soon after PMI data was released last week. EURESTECBM1X2=ICAP

ECB board member Isabel Schnabel said on Wednesday that the central bank should cut interest rates only gradually, while Francois Villeroy de Galhau said on Thursday that the ECB should keep its options open for a bigger rate cut next month.

Germany's 2-year government bond yields DE2YT=RR - more sensitive to ECB policy expectations - dropped 4 bps to 1.964%, its lowest level since December 2022, on track to end the month 35 bps lower in its steepest decline in nearly a year.

A key market gauge of long-term inflation expectations for the euro area EUIL5YF5Y=R was at 1.9854%.

The gap between French and German yields DE10FR10=RR – a gauge of the premium investors demand to hold France's debt – rose to 82.2 bps. It hit 90 bps earlier this week, its widest level since 2012.

On Thursday, Prime Minister Barnier dropped plans to raise electricity taxes in his 2025 budget, bowing to far-right threats. However, the National Rally (RN) warned the concession was insufficient to avoid a no-confidence vote as early as next week.

The possible collapse of the government casts further doubt on the country's ability to curb an increasing public deficit.

Barclays said that such a scenario would likely push the French/German yield spread above 100 bps, while driving French bond yields much closer to their Italian equivalents.

Italy's 10-year yields – the benchmark for the euro area periphery – dropped 4 bps to 3.309% and were down 20 bps on the week. The yield spread over Germany's Bunds was at 120.9 bps.

S&P will review its rating on France's debt later on Friday.

"We have argued before that following the downgrade to AA-/stable on 31 May, a further downgrade seems unlikely at this stage, while a negative outlook is possible," said Christoph Rieger, head of rates and credit research at Commerzbank.

(Reporting by Stefano Rebaudo, additional reporting by Medha Singh; editing by Kirsten Donovan and Daren Butler)

((stefano.rebaudo@tr.com))