* Oil highest in over 3 year highs
* German 10-year bond yield at 1-month high, others follow
* Euro zone yields up 5-7 bps
* Italy/German yield gap at tightest since August 2016 (Updates price action)
By Fanny Potkin and Dhara Ranasinghe
LONDON, April 19 (Reuters) - Euro zone bond yields jumped to one-month peaks on Thursday as oil prices climbed to their highest level since late 2014, raising the prospect of upward pressure on inflation.
Oil prices rose as U.S. crude inventories declined and after sources told Reuters that top exporter Saudi Arabia aims to push prices even higher.
Sustained higher energy prices could feed through into higher inflation, potentially speeding up a tightening of monetary policy in the euro zone.
Combined with new bond supply from France and Spain, the rise in oil prices gave investors an incentive to sell bonds after recent strong price gains.
Ten-year bond yields, which move in the opposite direction to the price, rose 5-7 basis points in late trade with those in Germany, France, Austria and Ireland all rising to around one-month highs.
Germany’s 10-year bond yield jumped to 0.60 percent and was set for its biggest one-day jump since September.
French yields rose to 0.84 percent and were poised for their biggest one-day rise since September.
A key market gauge of long-term inflation expectations in the euro zone meanwhile rose to its highest level in five weeks, to about 1.7 percent.
“Oil has an impact on the yield segment, on Bunds, but it’s still rather moderate,” said DZ Bank strategist Daniel Lenk.
New bond supply from France and Spain added to upward pressure on yields. France sold around 7 billion euros of debt, while Spain auctioned 4.6 billion euros of bonds.
“The volume of issuance today also explains the move in a quiet market,” said Rabobank fixed income strategist Lyn Graham-Taylor.
In late trade, Swiss bonds also came under pressure after the Swiss franc fell to its lowest level against the euro since the central bank removed a currency cap in January 2015.
The gap between Italian and German borrowing costs narrowed further to 117 bps, its tightest since August 2016.
Italy has reached a political impasse in the wake of an inconclusive election, but the market has taken some solace from the fact that a populist coalition looks unlikely to be formed.
The anti-establishment 5-Star Movement on Wednesday challenged the far-right League to abandon its electoral allies by the end of the week and form a joint government, but it was unclear whether the League would agree to such a move.
Analysts said the lack of progress on a coalition between the two was reassuring to markets; both are hostile to EU budget rules and the anti-immigration League also wants to leave the euro zone. (Reporting by Fanny Potkin and Dhara Ranasinghe; Editing by Toby Chopra and Hugh Lawson)