(Adds details, comments, updates market moves)
By Yoruk Bahceli and Abhinav Ramnarayan
Oct 28 (Reuters) - Italian bond yields were set for their biggest daily rise in over a year on Thursday after ECB President Christine Lagarde disappointed investors' hopes she would calm their concerns over surging inflation and rate hikes.
Euro zone bond yields were already up sharply on Thursday ahead of the ECB meeting as money markets moved to price in a 20 basis point, or two full ECB rate hikes by December 2022.
The money market bets briefly rose further as Lagarde spoke.
In addition to the acceleration in rate hike bets in recent weeks, market-based euro zone future inflation gauges have also risen past the ECB's 2% inflation target.
Lagarde reiterated that market pricing was at odds with the bank's rate hike expectations and it expects inflation to remain below its target in the medium-term.
But she also said that some supply issues, a driver of elevated inflation, will persist for most of 2022.
Despite the recent rise in bond yields, she said financial conditions remain favourable.
"I think essentially Lagarde was trying to be dovish but wasn't quite dovish enough for the market. When she says things like supply constraints will remain in place for longer than expected, this is one thing markets are worried about - inflation remaining high and central banks remaining behind the curve," said Peter McCallum, rates strategist at Mizuho.
Yields on Italian bonds - one of the biggest beneficiaries of ECB stimulus - extended an earlier rise and rose above 1% for the first time since late May.
By 1401 GMT they were up 13 bps on the day in the biggest daily rise since April 2020.
The closely-watched gap between 10-year Italian and German yields touched 115 bps, the highest since May.
Germany's 10-year bond yield, the benchmark for the euro area, rose as much as 7 bps and was last up 5 bps to -0.13%.
And Germany's inflation-linked, or real 10-year bond yield also surged, rising as much as 9 bps on the day to -1.954% after touching a record low on Wednesday.
Market gauges of long-term inflation - another spot Lagarde had been expected to push back against - remained elevated. A key euro zone-wide gauge just under 2.08%, near seven-year highs above the ECB's 2% target.
"Everyone was expecting some sort of pushback on market pricing of rate hikes, but we got a timid version of a pushback. Either you are into this and you have something to say about market expectations or you don't," said Frederik Ducrozet, global macro strategist at Pictet Asset Management.
The euro extended gains and was up 0.5% at 1.1661 in late London trading thanks to a broadly struggling dollar after the U.S. data miss.
Euro zone shares briefly reduced their gains during Lagarde's speech before rising back again, and were last up 0.1%. Rates-sensitive banks were down 0.4%. (Reporting by Yoruk Bahceli and Abhinav Ramnarayan, additional reporting by Danilo Masoni and Saikat Chatterjee; editing by Barbara Lewis)