* Key week for world bond markets
* Italy govt must present budget targets this week
* Fed to hike rates this week, ECB’s Draghi speaks Monday
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates price action, Italy news, comment, adds chart)
By Dhara Ranasinghe
LONDON, Sept 24 (Reuters) - Italy led bond yields in the euro area up on Monday, as investors braced for the new government in Rome to present its budget targets in a week that is also likely to see the U.S. Federal Reserve lift rates for a third time this year.
Expectations for tighter monetary policy from major central banks has prompted selling in major bond markets this month, with German yields on Monday rising back towards three-month highs hit last week.
European Central Bank President Mario Draghi is scheduled to speak at the European Parliament later on Monday.
In Italy, Economy Minister Giovanni Tria has to set growth, deficit and debt targets for next year’s budget by Thursday.
Top officials met on Monday to hammer out a budget agreement, a government source said.
Tria, an academic who is not a member of the two ruling parties, is locked in a tug-of-war with the anti-establishment 5-Star and right-wing League, who want major spending on their flagship campaign promises amid flagging growth.
“Markets are probably comfortable with something close to 2 percent on the budget deficit forecast,” said Chris Scicluna, head of economic research at Daiwa Securities.
The chief economic adviser for the League said on Monday that a deficit target of 2.5 percent of gross domestic product in the 2019 budget, coupled with a policy to boost growth, would be acceptable for markets.
Claudio Borghi also repeated that Italy’s exit from the euro, which the League once called for, was “out of the question”.
Italy’s two-year bond yield rose 6.5 basis points to 0.83 percent. Ten-year yields were up 6 bps at 2.90 percent, pushing the gap over German bond yields to around 241 bps from 235 bps late Friday.
Italian debt insurance costs crept up to 221 bps from 218 on Friday, according to IHS Markit, the highest since Sept. 17.
“Those who have had a long position on BTPs have taken profit in recent days,” said BBVA strategist Jaime Costero Denche.
“However, the deficit numbers the government is talking about, 1.6-2.5 percent with no anti-European strategy, suggests the spread (over German bonds) will go back towards 200 bps.”
Germany’s 10-year bond yield rose 2 bps to 0.48 percent, heading towards highs above 0.50 percent hit last week.
The ECB should speed up its exit from “crisis-mode” monetary policy, ECB policymaker Ewald Nowotny said on Sunday.
The Fed meanwhile is expected to raise rates again this week and unease about further hikes have pushed 10-year U.S. Treasury yields back above 3 percent.
“The rise in global bond yields is related to higher rates from central banks - not just the Fed or emerging markets such as Turkey,” said Frederik Ducrozet, senior economist Europe at Pictet Wealth Management. “Around a third of global central banks are now hiking rates.”
Reporting by Dhara Ranasinghe; Additional reporting by Sujata Rao; Editing by Alison Williams