* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Adds U.S. treasuries, yield recovery) LONDON, July 26 (Reuters) - Germany’s 10-year bond yields briefly touched their lowest levels in around 5-1/2 months on Monday, hit by disappointing German business sentiment, before gradually rebounding as sentiment towards the economic recovery improved. European stock markets came under pressure in early trading from concerns over tightening regulations in China and after a top Chinese diplomat took a confrontational tone during high-level talks with the United States. In Germany, the Ifo institute said its business climate index fell to 100.8 from 101.7 in June, a sign that supply chain worries and the resurgent pandemic were denting German business sentiment. Germany’s Bund yield fell by as much as 3 basis points to around -0.45%, its lowest level since February, before edging higher as stocks markets pared most of their losses. The bund was last trading at -0.41%, little changed on the day. A similar pattern was experienced by U.S. Treasury yields, which fell sharply in early hours with the U.S. 10-year Treasury yield falling to 1.22% and rising back to about 1.28%. Investors are expected to trade cautiously ahead of the Federal Reserve’s monetary policy meeting this week. Yields across the European single currency bloc have fallen sharply this month as a resurgent Delta coronavirus variant fuels uncertainty over the global economic growth outlook and investors bet that both world growth and inflation may have peaked. “The Ifo was not a big concern for us and we did have a good German PMI (Purchasing Manager’s Index) on Friday, but perhaps the data adds to the concerns about the growth outlook,” said Chris Scicluna, head of economic research at Daiwa Capital markets. Elsewhere, Italy’s 10-year bond yield fell to around 0.61% , briefly touching its lowest level in almost four months and bounced back to about 0.64%. The European Central Bank last week pushed away the prospect of any rate hike, ruling it out until inflation is within sight of its 2% target. Its dovish stance has also bolstered euro zone bond markets. “The ECB’s current monetary-policy stance is underpinning the low level of Bund yields and we do not expect a positive impulse for yields from the central bank in the near future,” analysts at UniCredit said in a note. Reporting by Dhara Ranasinghe; additional reporting by Julien Ponthus; Editing by Giles Elgood, Alex Richardson and Barbara Lewis Our Standards: The Thomson Reuters Trust Principles.