LONDON, July 3 (Reuters) - The risk premium investors demand to hold French debt narrowed on Wednesday as the prospect of National Rally (RN) securing a majority in France's parliament lessened, as anti-RN candidates coordinated a series of withdrawals in a bid to block the far right.

More than 200 candidates from the Left Alliance and President Emmanuel Macron's party confirmed they would step aside from Sunday's second-round election, as they called on voters to select whichever candidate was best placed to defeat the local RN rival.

"The strategy would significantly limit the chances of Le Pen winning an outright majority," Jefferies chief Europe economist Mohit Kumar said in a note, referring to RN leader Marine Le Pen.

"With both the far right or the far left unable to have the numbers to implement extreme policies, the scenario should be a near-term positive for the markets."

France's 10-year bond yield was last down 3 basis points (bps) at 3.303%. On Tuesday it hit its highest level since November at 3.373%. Bond yields move inversely with prices.

The gap between French and German 10-year sovereign bond yields - a gauge of the premium investors demand for the extra risk of holding French bonds – tightened to 67.8 bps, its narrowest since June 13. It was last at 69 bps.

The spread hit 85 bps on Friday, its widest since 2012, and despite falling back after the first round of the French election, it remains more than 20 bps wider than before Macron called the election on June 9.

Daiwa Capital Markets head of research Chris Scicluna said he does not expect the gap to narrow to where it was before Macron's shock announcement.

"The policy paralysis we're going to see now means we're not going to have that correction of the fiscal stance in France this year," Scicluna said.

"It certainly makes sense to have a repricing in France from where we were a couple of months ago."

POLICY OUTLOOK

Markets were also paying attention to the monetary policy outlook after data on Tuesday showed euro zone consumer price inflation eased last month.

European Central Bank President Christine Lagarde said on Tuesday that inflation was heading in the right direction but failed to give many hints about the timing of the next rate cut.

The central bank lowered its deposit rate to 3.75% from a record 4% last month, but markets and policymakers have all but ruled out another cut at this month's meeting.

Money-market traders are pricing in a less than 5% chance of lower borrowing costs in July, and around a 65% probability of a rate cut in September.

Speaking at the same event as Lagarde, Federal Reserve Chair Jerome Powell also gave few hints about the timing of the first rate cut of the cycle, even as he said the U.S. was back on a "disinflationary path."

"Powell kept his powder dry yesterday," Daiwa's Scicluna said. "He didn't really offer any new insights into the Fed's reaction function, which is also true of Lagarde from the perspective of the ECB."

Germany's 10-year bond yield, the euro area benchmark, was up less than half a basis point at 2.611%.

Italy's 10-year bond yield was down 4.5 bps at 4.032%. (Reporting by Samuel Indyk; Editing by Sonali Paul and David Holmes)