German bond yields rise on reports of OPEC production cut

* Reports of OPEC cut push up U.S., German bond yields

* Gap between Germany and U.S. 10-year yields grows

* ECB report soothes nerves before Italian, Austrian votes

* Extra focus on Italy after Monte dei Paschi (Milan: BMPS.MI - news) rescue plan (Writes through)

By Abhinav Ramnarayan

LONDON, Nov 30 (Reuters) - Germany's benchmark bond yields rose on Wednesday as oil prices surged after sources told Reuters OPEC had agreed to limit crude output.

Sources in the producer group said the Organization of the Petroleum Exporting Countries had decided on its first oil output cuts since 2008.

U.S. Treasuries led the global bond sell-off, with 10-year yields rising 8 basis points to 2.38 percent after Brent crude at one point topped $50 a barrel, erasing Tuesday's losses, as expectations for a deal to cut output grew.

Brent last traded at $49.94, up 7.7 percent.

The yield on Germany's 10-year bond reversed the morning's fall and was up 1.6 bps at 0.25 percent.

"Clearly the OPEC news has had a big impact on Treasuries, and Bunds have moved in sympathy with this," said Mizuho strategist Peter Chatwell. "Having said that, the spread between Bunds and Treasuries has widened further today."

The gap (Frankfurt: 863533 - news) between 10-year borrowing costs for Germany and the United States stretched to 213 bps, within a whisker of its widest since at least 1990.

Earlier, bond yields fell on expectations the European Central Bank would step in to buy Italian government bonds should this weekend's referendum on constitutional change go against Prime Minister Matteo Renzi.

A Reuters report on Tuesday that the ECB was ready to temporarily step up purchases of Italian government bonds if its borrowing costs spiked was the primary driver.

"This reaction function does indicate that the ECB is aware of the important support that quantitative easing lends to the periphery," ING strategist Padhraic Garvey said.

In early trading, Italian and Austrian government bonds recovered this week's losses before votes on Sunday in each country. Austrians will choose a president in a repeat election that could produce the first far-right head of state in the European Union.

However, by 1500 GMT, the yield on Italy's 10-year bond was up 1.8 bps to almost 2 percent.

Polls suggest that a "No" vote is likely in Italy's referendum and this could render Renzi's position untenable.

It could in turn jeopardise Italy's ailing banking sector just as lender Monte dei Paschi embarks on a rescue plan.

Most other euro zone bonds were also flat to 3 bps higher.

Greece was the exception, its 10-year government bond yields hitting a two-year low of 6.62 percent, down as much as 43 bps on the day. Analysts cited a Wall Street Journal report that the euro zone's bailout fund had drawn up proposals that could cut Greek debt sharply.

The ESM confirmed its managing director would present euro zone finance ministers with a paper outlining possible short-term debt relief for Greece. It said the proposal had yet to be endorsed by the ministers, who meet in Brussels on Dec. 5.

The chair of the Eurogroup of euro zone finance ministers said on Tuesday that European lenders should be "realistic" in the fiscal targets they set for Greece after 2018, suggesting that the current budget targets may be eased.

For Reuters new 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 Mark Heinrich)