UPDATE 2-Italy leads peripheral rally on expectation of ECB stimulus

* Short-dated Italian bonds outperform on dovish ECB

* 10-year Portugal bond yield hits four-year low

* France mandates for 30-year syndication (Updates prices)

LONDON, Feb 18 (Reuters) - Short-dated Italian government bonds outperformed on Monday, their yields falling the most among euro zone bonds to lead a rally in the periphery, on expectations of more monetary stimulus from the European Central Bank.

Italian two- and five-year government bond yields fell as much as eight basis points after comments by ECB policymakers Francois Villeroy de Galhau, Olli Rehn and Benoit Coeure raised expectations of new cheap loans for banks from the central bank.

Coeure’s comments on Friday saw euro zone banking shares jump more than 3 percent, the euro fall and Italy’s bond yields tumble.

Italian short-dated bonds outperformed because analysts expect any more cheap ECB loans to banks to have a maturity of two to four years, according to Daniel Lenz, rates strategist at DZ Bank.

“We expect banks to invest in the same maturities as this tender,” he said.

Rehn told a German newspaper that recent data suggested a weakening euro zone economy, adding that interest rates would remain where they were until monetary policy goals were met.

Analysts took Villeroy de Galhau’s comments to indicate that if Europe’s economic slowdown looks permanent, the ECB might delay its forward guidance on interest rates.

Expectations of a fresh round of cheap bank funding helped peripheral bonds on Monday, when Italy’s government bond yields extended declines late last week by around two basis points across the curve.

Italy’s 10-year bond yield fell to a two-week low of 2.75 percent before settling at 2.77 percent. Spain’s 10-year government bond yield was also down one basis point to 1.234 percent.

The market was pinning hopes on a single-party government in Italy, Lenz said, after the country’s 5-Star Movement called an online vote to decide whether to block a possible kidnapping trial of Matteo Salvini, the leader of 5-Star’s coalition ally, the League party.

“In case there is a majority, this could trigger new speculation about the end of the ruling coalition in Rome and increases the chance of snap elections,” he said.

The ECB chatter also helped Portuguese bonds, with its 10-year government bond yield hitting its lowest since March 2015, down two basis points on the day to 1.54 percent .

Elsewhere, Germany’s 10-year government bond, the benchmark for the region, edged higher to 0.11 percent after falling as low as 0.07 percent on Feb. 8.

Some 20 billion to 23.5 billion euros of new supply is due this week, analysts at UniCredit predicted. New issuance from France, Spain, Germany, Italy and Slovakia will be supported by 16 billion euros of redemptions from Germany and 0.5 billion euros of coupons from Ireland, Austria and Germany.

France has mandated banks for the issue of a new 30-year bond to be sold soon, the Agence France Tresor public debt management agency said on Monday.

In addition, Cyprus picked Citi, Goldman Sachs and HSBC to arrange fixed-income investor meetings for a new euro-denominated deal that may come this week. (Reporting by Virginia Furness; editing by Larry King)