* Italy/Germany bond yield gap widens to 280 bps
* Italy bond yields higher, underperform euro area
* Turkey contagion fears, Italy uncertainty weigh
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates prices)
By Dhara Ranasinghe
LONDON, Aug 13 (Reuters) - The yield premium investors demand for holding Italian bonds over top-rated Germany rose to its highest since late May on Monday, propelled by political uncertainty in Italy and concerns about contagion from the financial crisis in Turkey.
Safe-haven German Bund yields fell to a one month low, but Spanish and Portuguese bond yields were dragged higher by their Italian peers and the broader risk off sentiment.
Italy once again stood out as the bloc’s underperformer, weighed down by conflicting comments from the government, global risk aversion and worries about the Italian banking sector’s exposure to Turkey.
Markets were unnerved on Friday by a report in the Financial Times that the European Central Bank was worried about European banks’ exposure to Turkey.
Euro zone bank stocks tumbled 1.65 percent to a six-week low on Monday as Turkey-exposed banks BBVA, Unicredit and BNP Paribas fell 0.8 to 3 percent.
“You have risk aversion and concerns about Turkey contagion risk hitting Italy against a backdrop of the Italian government not quite on the firmest footing,” said David Vickers, a senior portfolio manager at Russell Investments in London.
“You look for where there is fragility and the uncertainties surrounding Italian politics are more acute when you get global pressures.”
Speculators will probably attack Italian financial markets this month but the country has the resources to defend itself, Giancarlo Giorgetti - a senior and highly influential government official - said in a newspaper interview on Sunday.
However, Deputy Prime Minister Luigi Di Maio said on Monday Italy was not at risk of a financial market attack and that his government could not be “threatened” by the idea.
Mixed messages from various government ministers and coalition officials have confused investors and exacerbated market concerns over the coalition’s economic plans.
Italy’s borrowing costs were 7 to 11 basis points higher on Monday, with its 10-year yield at one point reaching a two-month high at 3.109 percent, heading back towards levels seen in late May when a political crisis triggered a huge sell-off in Italian debt.
Italian five-year bond yields also hit a two-month high at 2.405 percent.
The gap between 10-year Italian and German government bond yields — a key gauge of investor appetite for risk — spiked to 280 bps before closing at 278 bps.
That’s up from 268 bps late on Friday and the widest since late May.
The spread has widened almost 47 bps this month.
“The comments by Di Maio in particular echo the economic warfare rhetoric we’ve seen from Turkey, so that probably doesn’t help,” said ING senior rates strategist Martin van Vliet.
At the same time, peripheral bond yields — perceived as riskier assets by euro zone bond investors — hit their highest levels in at least six weeks.,
On Monday, South Africa’s rand plunged to a two-year low against the dollar.
The strain in emerging markets bolstered safe-haven bonds, with Germany’s 10-year Bund yield hitting a one-month low at 0.301 percent.
Elsewhere, a rise in Greek bond yields was limited by an unexpected Fitch Ratings upgrade on Friday.
Reporting and graphic by Dhara Ranasinghe; additional reporting by Virginia Furness; Editing by Toby Chopra