Euro zone yields dropped after cooler than expected U.S. inflation caused markets to increase bets the Federal Reserve could cut interest rates as soon as September.

U.S. consumer prices were unexpectedly unchanged in May month on month, and 3.3% year on year, both below analysts' expectations, causing markets to price roughly a 70% chance of a Fed rate cut by September.

Germany's 10-year government bond yield, the benchmark for the euro area, was last down 8 basis points at 2.54%, having been down 2.4 bps before the data.

Italy's 10 year yield dropped 12 basis points to 3.94%

(Reporting by Stefano Rebaudo and Alun John, editing by Kim Coghill and Andrew Heavens)