EURO GOVT-Italian bonds slide, Bunds rally ahead of EU meeting

* Italian bonds slide on debt worries, pull periphery wider

* EU officials to hold emergency meeting

* Bunds rally on risk-averse sentiment

By Kirsten Donovan

LONDON , July 11 (Reuters) - Italian government bonds slid on Monday as top European officials prepared for an emergency meeting to discuss the euro zone debt crisis that threatens to engulf the bloc's third-biggest economy.

With yield premiums for other peripheral issuers also rising, safe-haven German Bunds benefited from the risk-averse sentiment, rallying to their highest levels since early December and pushing 10-year yields below 2.75 percent.

The spread between the Italian 10-year government bond yield and that of benchmark German Bunds hit fresh euro lifetime highs of 268 basis points as the 10-year yield rose to above 5.45 percent. BTP futures FBTPc1 sank more than 150 ticks.

"The reaction in spreads and yields is quite substantial, which seems to indicate investors are panicked and the crisis is spreading further and further," said WestLB rate strategist Michael Leister.

"Spain and Italy are the systemic countries for the euro zone and they'd be difficult to bailout."

With Spain and Italy under fire, euro zone officials are under increasing pressure to find a solution to Greece's unsustainable debt situation.

European Central Bank President Jean-Claude Trichet will attend Monday's meeting, joining other top EU finance officials to hold critical talks on Greece and the worsening situation in Italy.

"Fundamentally, Spain and Italy are on solid foundations," WestLB's Leister said.

"But for now you have to respect the short-term dynamics and those point to wider spreads as it's hard to imagine anything that can turn sentiment around in the very near-term."

The Italian two- to 10-year yield curve has flattened around 20 bps over the last week, a pattern seen with previous stressed peripherals as markets begin to price in a credit premium.

"Maybe 'patient zero' was originating in the hedge fund community but I don't think it's just leveraged accounts which are selling," said Peter Schaffrik, rate strategist at RBC Capital Markets.

"We know for instance that the Italian-based investor community are very downbeat already on Italy... we certainly also know of some regular real money accounts who have been on the selling side."

Gary Jenkins, head of fixed income at Evolution Securities, said that while Italy is still a long way from the tipping point in terms of bond yields -- markets have focused on yields of 7 percent as unsustainable -- recent experience shows how quickly things can get out of control.

Greece, Ireland and Portugal spent an average 43 consecutive days trading over 5.50 percent before they went north of 6.00 percent on a consistent basis, Jenkins said.

That fell to an average of 24 consecutive days before rising above 6.50 percent, and just 15 days before the 7.00 percent level was breached on a consistent basis.

"The endgame is probably fiscal union because (the crisis) is just going to move from one country to the next," Jenkins said.

"Italy with a debt to GDP ratio of 120 percent and debt of 1.6 trillion euros is a pretty big elephant to have in the room... you have to stop the contagion getting to Italy."

Spanish 10-year yields hit 5.86 percent, matching euro-era highs last seen in 2000.

Italy's government -- with the highest sovereign debt ratio relative to its economy in the euro zone after Greece -- has scrambled to present a united front and defend its embattled economy minister. .

September Bund futures FGBLu1 rallied to their highest levels since the end of November at 128.54, over a full point higher on the day.

Societe Generale's technical analysts said a break above the late June high of 127.57 called for a rise to the upper end of the medium-term rising channel, which comes at 128.71 today.

Ten-year Bund yields were over 10 bps lower at 2.727 percent with two-year yields 7 bps lower at 1.39 percent. (Reporting by Kirsten Donovan; Additional reporting by William James; Graphics by Scott Barber and Kirsten Donovan; Editing by Catherine Evans)