UPDATE 1-Euro zone yields surge on Brexit deal agreement

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* Bonds extend selloff after EU, Britain reach new deal

* German 10-year his close to 3-month high

* Euro zone periphery govt bond yields http://tmsnrt.rs/2ii2Bqr (Recasts after Brexit deal agreement, adds new quote, details)

By Tommy Wilkes and Elizabeth Howcroft

LONDON, Oct 17 (Reuters) - Euro zone bond yields surged on Thursday after the European Union and Britain announced a new Brexit withdrawal deal.

The 10-year German government bond yield rose as much as 7 basis points to -0.33%. Other core bond yields, including the French and Dutch, also rose, underlining the importance of a Brexit deal for euro zone economies as well as the British.

Britain's 10-year gilt yield rose 4 bps to 0.75% . It had fallen to 0.66% when optimism over a Brexit deal was fading.

The move in yields mirrored a rally by European stocks, the pound and the euro as investors dumped safer assets for riskier bets. Money markets further trimmed their expectations for interest rate cuts in the euro zone.

After several days of negotiations, Prime Minister Boris Johnson said that Britain and the EU had agreed a "great" new Brexit deal. European Commission President Jean-Claude Juncker said an EU summit should endorse the agreement.

However, Northern Ireland's Democratic Unionist Party reiterated that it could not support the proposed Brexit deal as it stood.

Irish bond yields did not rise significantly. The 10-year yield was last 2 bps higher at 0.06%.

"The markets have said there is an expectation of a deal, I think right now the thing is still delicate because even if we do get a deal it needs parliamentary approval," said Pooja Kumra, European rates strategist at TD Securities.

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Kumra said she was cautious but that the "chances of a deal have increased massively since October."

Investors have been dumping euro zone bonds in recent days, anticipating Britain and the EU can reach another agreement on Britain's departure, avoiding more uncertainty that could damage both economies.

A market gauge of long-term euro zone inflation expectations on Thursday rose to a nearly four-week high at 1.235%.

Story continues

Lyn Graham-Taylor, fixed income strategist at Rabobank, speaking before the announcement of a deal, said even an extension to Britain's departure beyond Oct. 31 could encourage more bond selling.

"An extension with a positive tone would see a positive selloff," he said.

Reduced tensions between China and the United States over trade, and some confidence that the euro zone economy is recovering, have also encouraged many to sell bonds for riskier assets. Weaker-than-expected U.S. retail sales data on Tuesday did little to reverse the selloff.

That was in contrast to the summer, when jittery investors piled into euro zone debt on any sign of economic weakness and in anticipation of another round of European Central Bank monetary easing.

(Editing by Larry King)

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