UPDATE 3-German yields briefly touch two-month high on U.S. data

(Adds market details)

By Yoruk Bahceli

Sept 16 (Reuters) - Germany's 10-year yield touched a two-month high on Thursday but was broadly flat in late afternoon trading as a sentiment boost provided by positive U.S. data gradually faded away.

Euro zone and U.S. bond yields edged up after data showed U.S. retail sales unexpectedly increased in August and the Philadelphia Federal Reserve business conditions index came in higher than expected.

Germany's 10-year yield, the benchmark for the bloc, rose to a new two-month high at -0.283% then fell back to -0.304% at 1527 GMT, tracking the direction of travel set by U.S. Treasury yields.

"I think with the Fed so close the market is a little bit reactionary to data like this," said Peter McCallum, rates strategist at Mizuho, referring to next week's U.S. central bank meeting.

"It certainly does give the hawks a little bit more ammunition, perhaps the way the Fed announces the tapering," he said, adding that the bank's base case is still for the Fed to announce the tapering of its bond purchases in November.

Focus was also on the primary market.

Austria received a record 42 billion euros of investor demand for a new 15-year bond, its finance agency said.

The deal will raise 5 billion euros, according to a lead manager memo seen by Reuters. Austria will retain 500 million euros of the bond, the memo said.

Christian Schreckeis, head of issuance and portfolio management, investor relations and federal budget at the Austrian finance agency, said this being Austria's last syndication of the year, and 16 billion euros of redemption flows from a bond that matured on Wednesday, helped boost demand.

"Yields remain low and so investors want to pick up yield by extending maturity," Schreckeis added.

More supply on Thursday came from auctions.

Spain raised 5.19 billion euros from bonds due 2024, 2026 and 2031.

France raised 9 billion euros from bonds due 2024, 2026 and 2027 and another 1.86 billion euros from inflation-linked bonds due 2026, 2031 and 2040.

Elsewhere, European Central Bank head Christine Lagarde said the euro zone economy is recovering quicker than anticipated just six months ago, thanks to the bloc's vaccination campaign that has allowed large sections of the economy to reopen.

The combined GDP of the bloc was now expected to return to its pre-crisis level before year-end, Lagarde added.

Earlier, Finnish central bank chief Olli Rehn said any exit from ECB crisis stimulus would be very gradual and would ensure favourable financial conditions were maintained.

The ECB last week decided to slow its pandemic emergency bond buying during the fourth quarter. (Reporting by Yoruk Bahceli in Amsterdam Additional reporting by Julien Ponthus Editing by Andrew Cawthorne and Matthew Lewis)