Italy's bond yields hover around flat before auction

* Most euro zone yields up 0-3 bps

* Italian parliament expected to be dissolved before end of week

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

By Fanny Potkin

LONDON, Dec (Shanghai: 600875.SS - news) 28 (Reuters) - Italy's 10-year borrowing costs were little changed on Thursday ahead of the last bond auction of 2017 which is seen as a key test of investor appetite for a country that will hold elections early next year.

The Italian treasury plans to auction between five to seven billion euros of debt over four bonds on Thursday.

President Sergio Mattarella is widely expected to dissolve parliament before the end of the week, mostly likely later on Thursday, clearing the way for national elections planned for early-March

Italy's ruling Democratic Party (PD), hit by internal divisions and a banking scandal, has been sliding in opinion polls, with a new survey on Saturday (Shenzhen: 002291.SZ - news) putting it more than six points behind the anti-establishment and eurosceptic 5-Star Movement.

Having benefited from an extension of the European Central Bank's ultra-easy monetary policy, Italian government bonds, known as BTPs, are seen as increasingly vulnerable to political risk.

"It appears unlikely that any of the three large political blocks that could be formed ahead (of) elections will be able to secure the outright majority needed... to appoint a government and to win power," analysts for Barclays (LSE: BARC.L - news) told clients earlier this month.

Italy's debt has had a roller-coaster year, benefiting in October from an unexpected decision by S&P Global Ratings to sovereign credit ratings.

Ten-year government bond yields rose to 1.92 percent, before easing to around 1.91 percent, according to Tradeweb .

The gap (Frankfurt: 863533 - news) between Italian and German bond yields -- often viewed as a gauge of how investors view relative risks -- slightly narrowed to around 150 basis points.

The German Bund curve is at its flattest in nine days, having taken cues from the Treasury market where the 2-10 curve hit its flattest since early December.

Germany's 10-year bond yield was up over two bps on Thursday at 0.405 percent.

Most other euro zone bonds were up 0-3 bps on the day.

Later on Thursday, the U.S Treasury will auction $28 billion in seven year notes, following disappointing results at at an 5-year auction earlier this week.

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(Reporting by Fanny Potkin, Editing by William Maclean)