Italian yields soar on possibility of early election in autumn

* Italy-Germany spread widens as Renzi flags possible autumn vote

* Yields drop after Draghi flies flag for extraordinary support

* Concerns over Europe-U.S. relations makes for jittery open

* Euro zone periphery govt bond yields: http://tmsnrt.rs/2ii2Bqr (Adds Draghi comments, updates prices)

By Abhinav Ramnarayan

LONDON, May 29 (Reuters) - Italian government bond yields shot up on Monday as investors fretted over the possibility of parliamentary elections being held as early as this autumn after comments from former Prime Minister Matteo Renzi.

Euro zone bond yields initially inched higher on Monday, but a cautious note struck by the region's top policymaker, Mario Draghi, dragged them back in the afternoon and 10-year German government bond yields hit a one-month low.

The one constant throughout was the higher spread between Italian and German 10-year borrowing costs, wider 10 basis points at one point to a two-week high of 186 basis points.

Renzi said on Sunday that it makes sense "from a European perspective" for Italy's next election be held at the same time as Germany's, scheduled for September, raising the prospect of what ING strategist Martin van Vliet described as "the last big political risk event in the euro zone".

Investors have been worried about the rise of anti-euro party 5-Star Movement, which has led some polls recently, and what it might mean for Italy's future in the single currency bloc. Polls at the moment point towards a hung parliament.

Italian government bond yields jumped 10 bps at one stage, and though they fell back another 4 bps as the session wore on, it was still the outlier as most other euro zone bond yields were lower on the day by afternoon trading.

Italian stocks also underperformed on the day, particularly the banking sector.

Though Van Vliet said that investors had woken up to the possibility of an Italian election in the autumn, he added that there is heightened market volatility with U.S. and UK investors on holiday on Monday.

"You could easily see this move reversing tomorrow when everyone is back," he said.

The session started on Monday with lower-rated southern European government yields rising after German Chancellor Angela Merkel warned of worsening relations between Europe and some of its allies, in particular the United States and Britain.

As the session wore on, however, the focus shifted from politics to policy, particularly after Draghi said the ECB remains firmly convinced that extraordinary monetary policy support is still necessary.

The yield on Germany's 10-year government bond , flat up to this point, then dropped 2.5 basis points to a one-month low of 0.31 percent.

Other high-rated euro zone bond yields were also lower 1-2 bps on the day.

Yields on Germany's 10-year bond have fallen in recent weeks from the mid-May peak of 0.46 percent as policymakers have played down the possibility of a sharp shift from ultra-loose monetary policy.

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(Reporting by Abhinav Ramnarayan; Editing by Andrew Bolton)