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UPDATE 3-Euro zone yields at multi-year highs, Italian bonds underperform

(Updates prices, adds comment from Christine Lagarde)

By Stefano Rebaudo

Sept 26 (Reuters) - Euro zone government bond yields jumped to multi-year highs amid expectations that central banks will keep tightening their monetary policy despite recession risks and a new sell-off in British gilts.

Meanwhile, the spread between Italian and German yields widened after the rightist coalition won a clear majority in Sunday's elections. Italian bond (BTP) prices are also more susceptible to shifts in interest rate expectations, given the country's vast debt burden.

Giorgia Meloni looks set to become Italy's first woman prime minister at the head of its most right-wing government since World War Two.

"Short-term, if domestic political risks remain relatively subdued, the short-base in BTPs may pressure spreads tighter," said Erjon Satko, rate strategist at BofA.

"That said, with a number of central banks reiterating a hawkish stance, the higher rates trend globally through terminal rate repricing likely remains the dominating driver," he added.

European Central Bank President Christine Lagarde on Tuesday repeated the central bank's most recent message that interest rates will need to rise over the next several policy meetings even as growth slows substantially.

Germany's 10-year yield hit its highest level since December 2011 at 2.132%, while the 2-year yield rose to its highest since December 2008 at 2.031%.

The German economy is heading for recession, the Ifo institute said on Monday.

British government bond prices kept plunging, with short-dated yields surging as much as 50 bps as finance minister Kwasi Kwarteng laid out a series of tax cuts on Friday in a bid to boost growth.

Two-year gilt yields hit their highest since September 2008 having surged over a percentage point since Friday, the biggest two-day jump since June 2008.

"Italy's elections have little to do with today's spread widening, as markets widely expected the outcome," said Massimiliano Maxia, senior fixed income specialist at Allianz Global Investors.

"Bond yields across Europe are correlated, and today's jump in Britain yields is again affecting the euro area," he added.

Investors had already priced in a victory of the centre-right coalition, and more clarity about the new government's policy might be needed before any significant change in investors' stance.

They see limited potential risks of a clash with the European Union in the near term. Meloni, during her campaign, soothed fears by pledging to abide by European Union budget rules and putting away anti-euro rhetoric, which triggered a sharp spread widening after the 2018 election.