(Corrects Bund yield in 5th paragraph to 0.03 percent)
* German manufacturing contracts for fourth month
* Survey shows tepid euro zone growth in April
* German Bund yields drop 5 bps to 0.03 pct
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr
By Abhinav Ramnarayan
LONDON, April 18 (Reuters) - Euro zone government bond yields fell on Thursday after a business survey painted a bleak picture for German manufacturing, fuelling worries about the euro zone economy.
Activity in Germany's services rose to a seven-month high in April, a survey showed on Thursday, but investors focused on the 44.5 reading for manufacturing, below the 50.0 mark separating growth from contraction although better than the 44.1 recorded last month.
In addition, data for the bloc overall showed growth slowing as demand barely rose despite smaller price increases. European stocks and the euro fell as investors retreated to euro zone government bonds, German Bunds in particular.
"The reading was better than last month, but below expectations and we could see from the market report that once again it's the core industry for Germany that's the worry - the carmakers are struggling," said DZ Bank analyst Sebastian Fellechner.
German 10-year bond yields, the benchmark for the euro zone, were five basis points lower at 0.03 percent, after rising as high as 0.10 percent earlier this week. Other yields were 4 to 5 bps lower.
The euro tumbled 0.4 percent to $1.12440. It was up 0.1 percent at $1.1304 before the data.
The euro zone stocks index and Germany's DAX fell to their lowest for the day after the German data, which followed a weaker-than-expected French manufacturing PMI reading.
Investors were hoping to see signs of stabilisation in the business survey that would ease pressure on the European Central Bank, which is looking for ways to boost growth and inflation.
Sources told Reuters this week that several ECB policymakers think the bank's economic projections are too optimistic as growth weakness in China and trade tensions linger. (Reporting by Abhinav Ramnarayan; editing by Larry King)