* German private sector shrinks for first time in over 6 years
* Euro zone bond yields slide
* Spain outperforms after S&P ratings upgrade
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Adds Draghi, Knot speeches, money markets reaction)
By Dhara Ranasinghe
LONDON, Sept 23 (Reuters) - Bond yields across the euro area tumbled on Monday after weaker-than-expected business activity data from the bloc's biggest economies deepened investors' recession fears.
German private sector activity shrank for the first time in 6-1/2 years in September, as a manufacturing recession worsened and growth in the service sector lost momentum too.
Markit's flash composite Purchasing Managers' Index (PMI), which tracks both the manufacturing and services sectors, fell to 49.1 from 51.7 in the previous month. It was the first time since April 2013 that the reading fell below the 50 mark that separates growth from contraction.
French business activity also slowed and the euro zone composite flash PMI sank to 50.4 from 51.9 in August.
The data sparked a rally in government bond markets, while the euro and regional stocks tumbled.
The data evoked concern because so far services had largely seemed immune to the contraction in manufacturing.
European Central Bank (ECB) chief Mario Draghi confirmed the worries, telling the European Parliament's committee on economic affairs that the euro zone economy was not showing any convincing sign of a rebound, and a persistent downturn in manufacturing risked infecting the rest of the economy.
Across the euro zone, 10-year bond yields were down 7-9 basis points on the day .
Germany's benchmark 10-year bond yield fell to -0.59% - its lowest level since the Sept. 12 ECB meeting that concluded with rate cuts and fresh asset purchases to boost weak growth.
It was on track for its biggest one-day fall since June 18, when a speech by Draghi in Portugal flagged the need for stimulus and set bond yields tumbling.
Rishi Mishra, interest rates strategist at Futures First Info Services, said he would not be surprised if the German Bund yield now returned to all-time lows around -0.70%.
A long-term measure of the market's euro zone inflation expectations meanwhile fell to 1.21% - its lowest since early-September, while money markets brought forward bets on an ECB rate cut to March 2020 from April.
ECB governing council member Klaas Knot said the bank should consider a broader inflation target, given the uncertainty about the impact of negative interest rates and open-ended bond purchasing.
Bond yields plunged across southern Europe - Italian yields were down 10 bps to 0.83%, while Spanish bond yields received an additional boost after S&P Global upped the country's credit rating to A from A- late on Friday. Spain's 10-year bond yield tumbled 10 bps to just 0.14%.
Rival ratings agency DBRS also changed the outlook on Spain's A rating to positive from stable, suggesting that the next move could be an upgrade.
Jim McCormick, global head of desk strategy at NatWest Markets, said Spain's average ratings score is now the highest in seven years.
"Spain's fundamentals already look more semi-core than peripheral," he said. "Importantly, this is slowly bringing Japanese investors into the market in bigger size."
Reporting by Dhara Ranasinghe; Additional reporting by Yoruk Bahceli; Editing by Angus MacSwan and Alex Richardson