* Ifo business climate index falls to lowest since 2012
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates prices for late trade, adds move in Italy)
By Dhara Ranasinghe
LONDON, Aug 26 (Reuters) - Euro zone government bond yields drifted up on Monday after the United States and China sought to ease trade war tensions, lifting sentiment in world markets and taking the shine off safe-haven debt.
But yields - which move in the opposite direction to bond prices - remained close to recent record lows, with data from Germany serving as a reminder that a bitter trade war is pushing Europe's biggest economy toward recession.
The Munich-based Ifo institute said its business climate index fell to the lowest since November 2012.
Most 10-year euro zone bond yields were about one basis point higher on the day , with trade subdued by a public holiday in Britain.
After China and the United States levelled more tariffs on each other's exports on Friday, Beijing called on Monday for calm and U.S. President Donald Trump said he believed China was seeking a deal.
"The latest headlines suggest a slight de-escalation," said Rainer Guntermann, a rates strategist at Commerzbank. "...That explains why yields are a bit higher and risk sentiment is picking up."
Germany's 10-year Bund yield was up just 1 basis point at -0.66% after falling to as low as -0.704% in early trade . Thirty-year bond yields gave up early falls to trade flat on the day at -0.16%
U.S. 10-year Treasury yields edged off their lowest since mid-2016 but held lower on the day.
Analysts said that even with the more positive trade headlines, the latest round of tariffs suggested more pain for the global economy.
"We believe markets will remain turbulent, as angst and relief about the impact of the trade war on the global economy seem to be alternating quickly," Zurich Insurance Company Investment Management analysts said in a note.
Global trade tensions have stoked concern about the growth outlook this year, pushing bond yields in the euro area deep into negative territory as investors bet on central bank action to shore up growth and inflation.
Germany's 10-year Bund yield has now spent 101 days in sub-zero yield territory, according to Refinitiv data.
Italy's bond yields rose 1-3 bps , having dipped briefly on signs of progress towards forming a new government.
A deal on forming a government between the 5-Star Movement and the opposition Democratic Party (PD) looked closer after the PD dropped a veto on Giuseppe Conte serving another term as prime minister.
Conte resigned last week. His reinstatement, insisted on by anti-establishment 5-Star but resisted by the centre-left PD, had been seen as the main stumbling block to a deal between the two traditionally antagonistic parties.
President Sergio Mattarella has given the PD and 5-Star until Tuesday to make progress.
Reporting by Dhara Ranasinghe Editing by Mark Heinrich, John Stonestreet and Peter Graff