Italian bonds shine, spotlight turns to Jackson Hole

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

By Dhara Ranasinghe

LONDON, Aug 23 (Reuters) - Most euro zone bond yields edged up on Friday in quiet trade ahead of a speech by U.S. Federal Reserve chief Jerome Powell, with hopes that snap elections in Italy can be avoided lifting sentiment towards that country's bonds.

President Sergio Mattarella on Thursday gave Italy's bickering parties five days to clinch a deal to resolve a political crisis and avoid an election.

Hopes of a deal between the anti-establishment 5-Star Movement, which has governed since last year with the far-right League, and the centre-left opposition Democratic Party (PD) have risen over the past week.

The PD on Thursday set tough conditions for an accord, increasing the chance of an autumn election. However, there is negotiating room, and Mattarella has now given the parties some time.

"Since the resignation of (Giuseppe) Conte as prime minister on Tuesday, the outperformance of BTPs has gathered momentum, which suggests there is hope a government will be formed and a budget will be in place," said Pooja Kumra, European rates strategist at TD Securities.

"The situation is still tricky although BTPs still have positive yields compared to other European government bonds, so that is supportive."

Italy's bond yields have fallen back after rising sharply on Aug. 9, when the League pulled the plug on its coalition with 5-Star. They fell 2-6 basis points on Friday, set for a second straight week of falls.

The 10-year Italian bond yield dipped to around 1.32% , close to its lowest in almost three years. The closely-watched gap over German bond yields narrowed to around 190 bps -- its tightest in four weeks.

In broader euro zone markets, 10-year bond yields were a touch higher on the day with trade largely subdued ahead of Powell's speech at a gathering of central bankers in Jackson Hole, Wyoming, expected at 1400 GMT.

Powell is caught between discord within the U.S. central bank over appropriate monetary policy and mounting outside pressure for more interest rate cuts.

"The market will not be looking too far beyond Jackson Hole today," analysts at Mizuho said in a note. "This is likely to set the tone for trading as the market properly returns in full from the summer, and some normality is restored."

(Reporting by Dhara Ranasinghe; editing by John Stonestreet)

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