* Euro zone bond yields up 2-3 bps, reverse falls after Ifo
* German Bund yields rise to 0.38 pct
* Fed chair confirms outlook for steady rate hikes
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates with reaction to U.S.-Mexico NAFTA deal, adds chart)
By Dhara Ranasinghe
LONDON, Aug 27 (Reuters) - Germany's benchmark 10-year bond yield rose to its highest level in more than two weeks on Monday, after a stronger-than-expected German business sentiment survey added to signs of an improving outlook for the euro zone economy.
News that Mexico and the United States had reached an agreement on bilateral issues in the renegotiation of the North American Free Trade Agreement (NAFTA) eased concerns about global trade tensions and accelerated selling in safe-haven bond markets in late trade.
The Munich-based Ifo economic institute said its business climate index jumped to 103.8 in August after 101.7 in July, suggesting that concerns about a global trade war among company executives in Europe's largest economy have eased.
The August reading beat a Reuters consensus forecast of 101.9. "The Ifo survey confirms the picture that the slowdown in leading indicators is a temporary blip," said Commerzbank rates strategist Michael Leister.
"If we get more evidence that the data flow is improving, markets will have to reassess whether an (ECB) rate hike that is priced in for only December next year is justified."
Germany's benchmark 10-year bond yield rose three basis points to 0.38 percent, its highest level in more than two weeks.
It was set for its biggest one-day jump in almost a month as safe-haven bonds also took a hit from a rally in risk assets and easing concerns about a global trade war.
The rise in German yields left the gap with U.S. Treasury yields at around 245 bps - close to its narrowest since early June as investors bet that perhaps the divergence in the U.S. and euro zone monetary policy outlooks is not as stark as it appeared just a few months ago.
Euro zone bond yields were 2-3 bps higher, although trade was subdued due to a holiday in Britain.
Yields had opened lower after reassuring comments from U.S. Federal Reserve chief Jerome Powell at the Jackson Hole symposium on Friday.
Powell defended the Fed's push to raise rates as healthy for the economy and signalled more hikes were coming - pushing the Treasury yield curve to its flattest since 2007.
"Powell's speech was interpreted as dovish, although I think there were some hawkish elements to it," said Jan von Gerich, chief analyst at Nordea in Helsinki.
Analysts said news that Finland plans to sell a new 10-year government bond via a syndicate of banks also came as a surprise to markets and added to upward pressure on yields.
An Italian bond auction on Thursday could prove a key test of sentiment, given concerns about the policies of the new anti-establishment coalition.
Italy's Deputy Prime Minister Luigi Di Maio on Monday threatened to veto the European Union's seven-year budget plan unless the bloc did more to share the burden of migrant arrivals.
Reporting by Dhara Ranasinghe; editing by Alison Williams and Andrew Roche