By Dhara Ranasinghe and Abhinav Ramnarayan
LONDON (Reuters) - Euro zone government bond yields fell on Tuesday after U.S. President Donald Trump fired Secretary of State Rex Tillerson, injecting a fresh dose of volatility into world markets.
Data showing U.S. inflation slowed in February also reassured investors, however, putting downward pressure on bond yields on both sides of the Atlantic.
"Treasuries reversed direction on the fear that Tillerson's removal will give the nationalists greater power within the White House over the globalists," said Investec economist Philip Shaw.
Trump said he had replaced Tillerson with Central Intelligence Agency Director Mike Pompeo, and had tapped Gina Haspel to lead the CIA.
The U.S. 10-year Treasury yield fell as much as 3 basis points on the Tillerson news and was last trading at around 2.85 percent , also held down by news of slowing inflation.
In Europe, bond yields fell 1-3 basis across the board.
Germany's 10-year government bond yield fell 2 bps to around 0.61 percent , its lowest level in just over a week, before steadying at 0.62 percent.
Europe's STOXX 600 <.STOXX> fell a hefty 1 percent as the session drew to a close. The pan-European banks index <.SX7P> also tumbled to the day's low, down 0.8 percent.
The dollar, meanwhile, extended its fall. It had already been weak across other G10 currencies after U.S. inflation data came in as forecast but it skidded further as the sell-off accelerated.
Against a basket of currencies, the dollar fell 0.3 percent <.DXY>, while the euro gained half a percent to $1.2404 .
Earlier, solid demand at Italian bond auctions helped underpin sentiment in euro zone bond markets.
The bond sales came against a backdrop of uncertainty following an inconclusive March 4 election in Italy, the potential impact of which investors appear to be largely shrugging off.
Elsewhere, Slovakia's 10-year bond yield rose as much as 6 basis points and the cost of insuring exposure to the country's debt hit the highest in almost three months as its government inched towards collapse.
Slovak debt continued to underperform euro zone peers after news of Tillerson's departure.
A government spokeswoman said the three ruling coalition parties were holding talks on Tuesday, after a junior member called for an early election following mass protests against corruption and the murder of a journalist last month.
(Additional reporting by Helen Reid and Tommy Wilkes; Editing by Catherine Evans)