UPDATE 3-Euro zone bond yields drop on economic data and U.S. Treasury rally

* Euro zone Q4 data worse than initially estimated

* EU gets 86 billion euros of demand for debt sale

* Euro zone periphery govt bond yields http://tmsnrt.rs/2ii2Bqr (Adds detail, updates prices)

By Abhinav Ramnarayan

LONDON, March 9 (Reuters) - Euro zone government bond yields dipped across the board on Tuesday after revised data showed that the region's economy ended 2020 worse than previously estimated and U.S. Treasury yields dropped before a key auction.

The euro zone economy contracted more than previously estimated in the last three months of 2020 compared with the previous quarter, data showed on Tuesday, as household consumption plunged because of COVID-19 lockdowns.

In addition, U.S. Treasuries rallied sharply ahead of a key auction, with 10-year yields - which move inversely to price - dropping by as much as 5 basis points on the day.

"The Q4 data is already quite old, but it might act as a reminder that the euro zone is going to be a laggard in terms of growth in 2021," said ING rates strategist Antoine Bouvet.

But he added that not too much should be read into the data because stocks are up and the rally could be as much led by U.S. Treasury yields. Major government bond yields around the world tend to track each other as many investors switch between them.

Euro zone government bond yields dipped across the board, having recently hit some of their highest levels in nearly a year as global bond yields rose rapidly on the back of reflation bets.

Germany's 10-year government bond yield fell 2 basis points to -0.30%, moving further away from the one-year high of -0.203% in late February.

Other euro zone bond yields also fell, with Italian 10-year yields down about 6 bps on the day in late trade.

Analysts, however, do not expect the economic gloom and the fall in yields to last as vaccination programmes progress in Europe and the United States, fuelling an economic recovery from the COVID-19 crisis.

In addition, data on Tuesday showed that the European Central Bank, which failed to increase the pace of its emergency purchases last week, barely nudged up buying even before subtracting debt that matured during the period, raising fresh questions about the ECB's resolve to stem a bond market selloff.

The bank has said that smaller than expected net purchases in the past two weeks were down to maturing bonds leaving its balance sheet.

In the primary market, the European Union continued fundraising for its SURE unemployment scheme through a nine billion euro ($10.7 billion) 15-year social bond sale, a lead manager said.

Final investor demand for the deal reached 86 billion euros, Refinitiv capital markets news service IFR reported. ($1 = 0.8414 euros)

(Reporting by Abhinav Ramnarayan Editing by Larry King, Emelia Sithole-Matarise and David Goodman )