Italian bond yields creep up before key votes in parliament

* Euro zone periphery govt bond yields http://tmsnrt.rs/2ii2Bqr

By Dhara Ranasinghe

LONDON, Jan 18 (Reuters) - Italy's borrowing costs crept back up on Monday as Prime Minister Giuseppe Conte faced two days of parliamentary votes that will decide if his fragile coalition can cling to power or has lost its majority.

Political turmoil in Italy, one of the euro zone's biggest and most indebted economies, is once again weighing on sentiment. Italian 10-year bond yields rose around 9 basis points last week in their biggest weekly jump since October.

Hefty stimulus from the European Central Bank and an expectation that a snap election is unlikely for now have limited the selloff in Italian bonds.

Still, the renewed turmoil has paused a rally in Italy's bond market that had sent the closely-watched 10-year bond yield gap over Germany to 98 bps just a week ago.

That was the tightest spread since 2016 and it has now widened out to 114 bps. Italy's 10-year bond yield was almost 3 bps higher on the day at 0.61% in early trade -- heading back towards six-week highs hit last week.

"We still view snap election risks as remote even if Conte fails, as a government of national unity probably remains the preferred attempt of president Mattarella until the next regular election in 2023," said Commerzbank rates strategist Rainer Guntermann.

Conte will address the lower house on Monday and the upper house, the Senate, on Tuesday about the future of his government after a junior partner quit the cabinet in a row over his handling of the twin coronavirus and economic crises.

Away from Italy, most other euro zone bond markets were relatively subdued. U.S. markets are closed for a holiday on Monday and traders are largely sidelined ahead of Thursday's ECB meeting.

There was some focus on Germany, where centrist Armin Laschet was on Saturday chosen to lead Angela Merkel's Christian Democrats, putting him in pole position to succeed her as Germany's next chancellor.

The news had little immediate impact on bond markets, with Laschet viewed as the Merkel continuity candidate.

Germany's 10-year bond yield was trading at -0.55% , little changed on the day.

(Reporting by Dhara Ranasinghe; Editing by Kirsten Donovan)