Policy, political uncertainty keep lid on euro zone bond yields

* German yields drop, Italy rises as politics drives markets

* French 10-year borrowing costs almost on par with Ireland (Other OTC: IRLD - news)

* Market scans for U.S. rate hike hints as Yellen testifies

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

By Abhinav Ramnarayan

LONDON, Feb 14 (Reuters) - Higher-rated euro zone government bond yields edged lower early on Tuesday in the face of an uncertain political and monetary policy outlook.

German economic growth figures also helped to cap yields, tamping down the inflation outlook as they came in slightly below expectations at 0.4 percent in the fourth quarter.

Bond yields have been rising since September last year on signs of a strengthening global economic outlook, stronger inflation data and an expected reduction in monetary stimulus.

"In general there is an upward trend for yields, and this won't go away, but the moves today show there are still many factors influencing markets," DZ Bank strategist, Daniel Lenz, said.

Inflation in the single currency bloc beat expectations to hit 1.8 percent for the month of January, close to the European Central Bank's target of below 2 percent and the highest since February 2013.

This added to upward pressure on Bund yields, which have been rising from their September trough of minus 0.19 percent.

But concerns around the future of the euro zone, prompted by upcoming elections in France and Germany as well as political uncertainty in Italy, and questions around the pace of U.S. interest rate hikes have tempered this trend, Lenz said.

The yield on Germany's 10-year government bond fell 1.4 basis points (bps) to 0.33 percent, while triple A-rated Dutch and Austrian equivalents also saw their yields edge lower.

Meanwhile, the yield on Italy's 10-year bond rose 1.6 bps to 2.24 percent, pushing the spread over German equivalents to 190 bps.

Former Italian Prime Minister Matteo Renzi on Monday called for a leadership contest in his ruling Democratic Party(PD), opening the way for a showdown with his many enemies in the PD ahead of approaching national elections.

France's 10-year borrowing costs rose 1.3 bps to 1.04 percent, and are now almost on par with Ireland for the first time since 2007, according to DZ Bank. Irish equivalents were at 1.06 percent.

U.S. Federal Reserve Chair Janet Yellen was due to give her semi-annual testimony to lawmakers, and her speech will be scrutinised for hints about the timing of prospective rate hikes by the world's most influential central bank.

"Any change in the economic outlook is likely to skew dovish following the last jobs report," Citi analysts said in a note.

U.S. job growth surged more than expected in January but wages barely rose, creating something of a mixed picture for the Fed as wage growth is one of the main drivers of inflation.

For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets (Editing by Louise Ireland)