Italy yields edge up after EU warns on 2014 budget
* EU Commission warns Italy over budget, yields rise
* Bunds stabilise after hefty central bank-driven gains
* Irish bonds stable as country not looking for new backstop
LONDON, Nov 15 (Reuters) - Italian bond yields edged up on Friday after the country was warned by the EU Commission that its draft budget for next year risked breaking the rules, bringing the focus back on the country's debt problems.
The commission said Finland, Malta and Luxembourg were also at risk of contravening the rules, while Spain, the Netherlands, Slovenia and France had no margin for error.
For Italy, which carries a 2 trillion euro debt burden, it is crucial to keep its budget deficit under control, analysts say, and the fragility of its left-right ruling coalition only makes its task harder.
"The budget for 2014 with the political boundaries the government faces create problems for Italy to giggle around with the deficit," said Gianluca Ziglio, executive director for fixed income research at Sunrise Brokers in London.
"This is what the commission is basically saying and it is what is weighing (on Italian bonds)."
Italian 10-year yields rose 4 basis points to 4.10 percent with the bonds underperforming euro zone peers.
The rise in yields was limited by speculation that the European Central Bank could ease monetary policy further, following a rate cut last week.
Also capping yields is the reduced debt supply pressure after last week's record sale of inflation linked bonds.
Italy said on Thursday it will not offer five-year bonds at its usual end-of-the-month auction. Instead, it will offer December 2018 bonds in exchange for some 2015 and 2017 bonds on Monday.
UniCredit rate strategist Luca Cazzulani in Milan said the ECB's stance "should lead to a decrease in credit spreads and to a flattening of the periphery curves up to five-years."
"We see the upcoming exchange auction as a good opportunity to extend duration," he added.
Spanish 10-year yields were 3 basis points higher at 4.10 percent, with Madrid due to announce details for its scheduled debt auction next week.
Ten-year German yields stabilised on Friday at 1.708 percent, but were poised for their seventh weekly fall in the past 10 weeks. Bund futures fell 6 ticks to 141.64, having gained a point in the past two days on signals of loose monetary policy on both sides of the Atlantic.
Appearing before the Senate for her confirmation hearing, Federal Reserve chief nominee Janet Yellen said on Thursday there were "dangers" in ending the Fed's current monetary stimulus too early.
Other euro zone bonds were steady, with markets giving Ireland the nod on its decision not to ask for a precautionary credit line as its current bailout programme ends this year.
"It's not only a sentiment driven success story. Fundamentals are quite supportive as well," said Emile Cardon, market economist at Rabobank in Utrecht.
Ten-year Irish yields were flat at 3.54 percent, having fallen from levels above 15 percent at the height of the crisis.