UPDATE 2-Germany's Bund yield hovers below six-month highs

* Bund yield holding off recent 6-month high of -0.21%

* Trade optimism lifts world markets

* Italy minister quits government

* Euro zone periphery govt bond yields (Updates prices for late trade)

LONDON, Dec 27 (Reuters) - Germany’s benchmark 10-year Bund yield held steady below recent six-month highs on Friday in listless, holiday-thinned trade.

News on Thursday that China is in close touch with the United States on signing a Phase 1 trade deal bolstered sentiment in world markets, keeping European stocks near record highs.

Still, bond yields across the single currency bloc were flat to a touch lower after debt markets reopened after the Christmas holiday.

“The main focus remains the trade issue between the U.S. and China,” said DZ Bank rates strategist Daniel Lenz.

“A lot of good news has been priced in already and even if the Phase 1 deal is signed, it doesn’t mean the whole issue has been settled as we still have Phase 2 to come and that could be challenging.”

He said this backdrop meant there were still reasons to be upbeat on fixed income markets after a stellar year that has seen borrowing costs fall to record low levels.

On Friday, 10-year bond yields in Germany, France and the Netherlands were broadly steady having dipped a basis point in early trade.

Germany’s Bund yield hovered at -0.24%, holding below six-month highs hit last week around -0.21%.

It has risen about 11 bps this month, reflecting an easing of world trade tensions and flickers of hope for a brighter economic outlook.

Still, yields in the euro zone’s benchmark bond issuer are poised to end the year around 50 bps lower in their biggest annual fall in five years.

DZ Bank expects the Bund yield to end 2020 around -0.5%.

In southern Europe, concern about Italian political stability put some widening pressure on the gap between 10-year Italian and German government bond yields, a key gauge of relative risks.

Italian Education Minister Lorenzo Fioramonti told Reuters on Wednesday he had resigned after failing to obtain from the government billions of euros he said were needed to improve the country’s schools and universities.

The resignation is a blow to the embattled government, whose ruling parties are at odds on issues ranging from euro zone reform to migrant rights.

The Italian/German 10-year bond yield gap briefly widened to around 173 bps - its widest level in over two weeks.

Reporting by Dhara Ranasinghe; Editing by Emelia Sithole-Matarise and Andrew Cawthorne