* Euro zone periphery govt bond yields http://tmsnrt.rs/2ii2Bqr
LONDON, Sept 18 (Reuters) - Italian government bond yields held near flat on Tuesday after tensions between top government officials over the 2019 budget appeared to re-emerge, stemming the recent rally in debt markets.
Financial markets remain on edge about the government's spending plans and Monday's meeting of ministers to discuss the 2019 budget saw friction building once again inside the coalition over the package.
No final decisions were taken and talks will continue in the coming days, a government source told Reuters. However, deputy prime ministers Luigi Di Maio and Matteo Salvini are pushing for a larger deficit than Economy Minister Giovanni Tria wanted to accept.
The source said both Di Maio and Salvini wanted a deficit of between 2.0 and 2.5 percent to help pay for some of their main electoral promises, including the introduction of a "universal wage" for the unemployed and pension reform.
The news was enough to push Italian yields up to three basis points higher at the open. Ten-year yields rose to highs of 2.89 percent before easing back to 2.86 percent, though they held off a high of 2.92 percent touched on Monday, according to Reuters data.
The moves reversed some of the yield declines triggered in recent days and early on Monday by reports the economy minister was set on preventing the 2019 budget deficit rising above 1.6 percent of domestic output.
"(The meeting) was not a game changer but it is enough to introduce some two-way risk," said Antoine Bouvet, rates strategist at Mizuho Bank. "Investors will be asking 'do I want to chase the rally now knowing that a large chunk of the good news has already been priced in."
Bouvet did not see a change in the longer-term picture in Italy but predicted "a pause in the tightening or some profit taking from investors".
Recent weeks have seen a recovery in sentiment about Italy after top officials said the government would respect European Union rules on fiscal discipline. That soothed fears that the anti-establishment coalition's plans to ramp up public spending would worsen the debt burden and bring Italy into conflict with European Union authorities.
The 10-year spread over Bunds widened to around 243 basis points according to TradeWeb data, though it is still around 10 bps lower than Friday’s peak. Trading remains choppy
"The market is beholden to headlines and there is a clear tension between the main parties driving these and how they will get there," said Matthew Cairns, rates strategist at Rabobank.