EURO GOVT-Political impasse sends Italian yields higher
* Italian yields rise, Bund futures hit new 2013 high
* Italian politics to remain key market driver near-term
* U.S. spending cuts kick in, growth worries pick up
By Marius Zaharia
LONDON, March 4 (Reuters) - Italian bond yields rose on Monday, with investors worried by the lack of progress in talks to form a government to deal with the country's economic problems.
Elections last week produced a hung parliament, raising the risk of a prolonged political deadlock, repeat polls and the paralysis of efforts to keep its 2 trillion public debt under control.
Pier Luigi Bersani, whose centre-left coalition has a lower house majority but not enough seats to control the Senate, on Friday ruled out a "grand coalition" with Silvio Berlusconi's centre right.
Comedian Beppe Grillo's 5-Star Movement, who came third, will not give a vote of confidence to any government and only consider backing individual laws. Grillo also said over the weekend that he supported a non-binding vote on Italy's euro zone membership.
Any agreement between the parties is seen as likely to be weak and shot-lived, while a technocrat government pursuing austerity is seen as an unpopular option that may increase support for Grillo.
The uncertainty in Italy supported flows into top-rated European debt, with German Bund futures holding on to last week's gains of almost two full points and seen rising further.
"Italy is the main driver," Rabobank rate strategist Lyn Graham-Taylor said.
"You've got no real decision politically on what's going to happen ... and whatever happens it's going to be messy."
Ten-year Italian bond yields were last 6 basis points higher on the day at 4.85 percent, close to last week's highs of just below 5 percent and compared with mid-January lows of around 4.10 percent.
Analysts expect selling pressure in Italian bonds to alternate with spells of buying interest from yield-hungry investors taking comfort in the safety net provided by the European Central Bank's so-far-untested bond-buying programme.
Bunds last traded 2 ticks higher at 145.53, having risen to a new 2013 high of 145.80 earlier in the session. Risks to the global economy were also keeping demand for German debt firm.
U.S. President Barack Obama and congressional Republican leaders failed last week to find an alternative plan to avert $85 billion worth of spending cuts, which economists expect to hit growth in the United States and elsewhere.
Neither side has expressed any confidence an agreement will be reached soon.
"With the Italy deadlock continuing and the U.S. budget (impasse) I don't see any reason why Bunds shouldn't stay supported," one trader said.
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