(Recasts, adds background)
By Samuel Indyk and Stefano Rebaudo
LONDON, April 6 (Reuters) - Euro area short-dated yields rose on Thursday after U.S. labour data, while robust numbers allayed recession worries in Germany.
German industrial production rose significantly more than expected in February, due in part to vehicle manufacturing.
The picture of the U.S. labour market was unclear following revisions to prior claims data after the government updated the model it uses to adjust the series for seasonal fluctuations.
Germany's two-year yield, the most sensitive to changes in policy rate expectations, was up 3.5 basis points (bps) at 2.55%.
"This week's batch of hard economic data for February shows a strong comeback for German industry," said ING global head of macro Carsten Brzeski.
"Today's industrial production data are a welcome sign of relief and evidence that German industry is more resilient than often feared," Brzeski added.
Germany's 10-year yield, the benchmark for the euro area, was down 0.5 bps at 2.18%.
Yields move inversely to prices.
European Central Bank chief economist Philip Lane told Cyprus News Agency that rates will need to rise again in May if the economy and inflation continue to develop along the path seen in its March economic projections.
Market expectations for the ECB terminal rate stood just under 3.5%, with the September 2023 ECB euro short-term rate (ESTR) forward at 3.42%, implying an ECB deposit rate of around 3.52%.
The November forward peaked above 4% in March, before troubles emerged at U.S. tech lender Silicon Valley Bank.
Friday's keenly eyed U.S. labour market report, when many markets are closed globally, will be the next data set that is likely to have an impact on the outlook for central bank policy.
"As we reach the end of the hiking cycle, market participants will be looking at every data point in minute detail in order to validate that a pause in rate hikes is imminent," Quilter Cheviot's Carter said.
Traders are pricing in a pause in rate hikes as the most likely outcome at the Fed's meeting next month, with around 75 bps worth of interest rate cuts priced by the end of the year.
Some analysts think this may be too aggressive.
"The Fed will need to see substantial progress on core inflation moving down to 2% before it even considers rate cuts and, hence, policy rates will likely remain at their peak for longer than markets are now expecting," UniCredit analysts said in a research note.
Italy's 10-year yield rose 1 bp to 4.02%, keeping the closely watched gap between German and Italian 10-year yields at around 183 bps. (Reporting by Samuel Indyk and Stefano Rebaudo; Editing by Conor Humphries, Christina Fincher and Jonathan Oatis)