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German bond yields drop for second week as Delta rattles markets

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* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates to close)

July 23 (Reuters) - The yield on Germany's 10-year bond, the euro zone's benchmark, fell for a second week in a row as fears over the spread of the Delta variant of the coronavirus rattled markets and prompted investors to buy safer assets.

Financial markets were volatile earlier in the week as sentiment over the global economic outlook swung with each new Delta headline, although the prevailing mood was improving by late Friday.

Euro zone bond yields ended the day broadly flat after a muted reaction to IHS Markit's flash Purchasing Managers' Index (PMI), which showed euro zone business activity expanded at its fastest monthly pace in over two decades in July.

Input prices, which are being watched closely given the focus on inflation, held steady from June's highs, but a composite future output reading slumped to its lowest since February, reflecting a dent in confidence given the spread of the Delta variant.

At 1547 GMT, Germany's 10-year yield, the benchmark for the region, was down by around one basis point on the day at -0.419%, and down around 1.3 bps for the week. It hit its lowest since February earlier this week at -0.44%.

Meanwhile, Italy's 10-year bond yield was flat at 0.628%. The closely watched gap to the equivalent German yield was at 104 bps, narrowing from yesterday's peak of 108 bps.

"Developments in the broader pandemic picture are likely to remain at the forefront of investors' concerns," UniCredit analysts said.

The European Central Bank on Thursday pledged to keep interest rates at record lows for even longer to boost the bloc's sluggish price growth, at its first meeting since it adopted a symmetrical, 2% inflation target as a result of its strategy review earlier in July.

Mizuho analysts said that the new approach carries a much lower risk of the ECB making an error and tightening policy at the wrong time, expecting that to lead to lower rates volatility.

ECB President Christine Lagarde said that the bank would not hike interest rates until it sees inflation reach the target at the mid-point of its projection horizon.

Three sources also told Reuters that the ECB does not expect to decide on the future of its emergency bond purchase programme in September as there would still be uncertainty over the path of the pandemic at that point. (Reporting by Yoruk Bahceli; Editing Andrew Heavens and Kirsten Donovan)

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