By Dhara Ranasinghe
LONDON, Jan 4 (Reuters) - Euro zone bonds started 2016 on solid ground on Monday, as tensions in the Middle East and a sharp sell-off in stocks on weak economic data from China sparked buying of safe-haven government debt.
Yields on 10-year bonds were 2-7 basis points lower across the region, and short-dated German government bond yields fell to their lowest in about two weeks.
European stocks tumbled more than 2 percent in early trade , with Chinese shares slumping 7 percent on news that Chinese factory activity contracted for a 10th straight month in December.
Heightened tensions between oil producers Iran and Saudi Arabia, which executed a top Shia cleric at the weekend, encouraged the safety play in bond markets.
Saudi Arabia used an attack on its embassy in Tehran as a pretext to fuel tensions, Iran's foreign ministry said on Monday after Riyadh severed diplomatic relations.
"All in all, the moves are still reasonably modest and markets are not sure what to make of this tension in the Middle East and whether it will escalate," said KBC strategist Piet Lammens.
The yield on two-year German bonds dipped to a two-week low of -0.35 percent. German five-year bond yields also fell to a two-week low at -0.082 percent while 10-year yields fell seven bps to 0.56 percent.
U.S. Treasury yields were also lower.
Rabobank said the resumption of the European Central Bank's bond-buying programme on Monday after a temporary pause for the Christmas break was also supporting euro zone bonds.
It said a strengthening of the euro, which helps dampen inflation in the euro zone, could also help explain the fall in bond yields.
The euro was trading at $1.0926, 0.6 percent firmer on the day.
(Reporting by Dhara Ranasinghe; editing by John Stonestreet)