UPDATE 1-French-German bond yield spread at six-month low as Le Pen slips in polls


* France-Germany spread tightens, low-rated bond yields drop

* Macron extends lead to 62-38 pct ahead of Sunday's vote

* Italy leads rally in low-rated euro zone govt bonds

* Euribor futures edge lower after authorities shelve reforms

* Euro zone periphery bond yields http://tmsnrt.rs/2ii2Bqr (Adds quote, updates prices)

LONDON, May 5 (Reuters) - The gap between French and German 10-year government borrowing costs hit a new six-month low on Friday as centrist Emmanuel Macron extended opinion poll gains over National Front leader Marine Le Pen ahead of this weekend's presidential election.

Macron is seen winning 62 percent of the vote in Sunday's second round compared to 38 percent for Le Pen, according to a poll released on the final day of the French election campaign.

"I think now this election is no longer an issue and the market is already starting to focus on new issues: inflation, the (euro zone) economy and the U.S. data," said DZ Bank strategist Daniel Lenz, referring to U.S. payroll numbers due out later on Friday.

On the back of the buoyant market, low-rated South European government bond yields dropped and the French-German government bond yield spread tightened to 35.5 basis points at one stage, its lowest since early November.

Italy was the standout performer on the day, with the yield on its 10-year government debt dropping 5 basis points to 2.19 percent, while the difference over Germany was at a two-month low of 181 basis points.

"Peripherals have had a very good week as concerns of an upset (in the French election) have dissipated and Italy has lagged the move so I can see why it is the focus today," said Rabobank strategist Richard McGuire.

"A Macron victory is a positive for Italy - but I do think from a longer strategic viewpoint as we get closer to Italian elections that (Italy-Germany) spread could shift again."

A national vote in Italy is due by May 2018.

Most other euro zone bond yields edged lower while short-dated Greek borrowing costs hit their lowest level since October 2014 after this week's bailout reform deal with European creditors.

Concerns that Le Pen would become France's president and try to take the country out of the euro had weighed heavily on French borrowing costs in recent months and those of South European countries, which are seen as most vulnerable to euro zone break-up risk.

But those moves have reversed as the presidential campaign has worn on and it has become apparent that Macron would be the likely winner. Friday's moves put the gloss on that reversal.

Ratings agency S&P Global is due to review Italy's credit rating, now just a notch away from junk status at BBB-, later on Friday but strong numbers have given investors confidence that it will keep its "stable" outlook.

Italy's service sector grew in April at its fastest rate for almost a decade, bolstering prospects for near-term economic growth, a survey showed on Thursday.

"Italy is still a problem child, but the PMI numbers were much better than in previous months and it seems that this year could turn out to be a positive one for the European economy," DZ's Lenz said.

Euro zone businesses raced into the second quarter, increasing activity at the fastest rate for six years in April, according to a survey on Thursday which suggested the bloc's economic recovery is broad-based and sustainable.

European money market futures edged lower on Friday after European authorities dropped reforms to how Euribor rates are set that could have led to lower daily fixings.

The Euribor rate will continue to be set under the existing methodology based on banks' quotes, the body that sets the reference rate said on Thursday.

Euribor futures across the July 2017-March 2019 strip fell 1-2 basis points as the implied rates on the future contracts rose.

For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.bi z / c m s / ? p a g e I d = l i v e m a r k e t s

(Editing by Louise Ireland and Ken Ferris)