* Worries over early elections, ECB withdrawal hit Italian bonds
Italy-Spain bond yield gap close to widest since 2012 crisis
* Spanish resolution of failing bank contrasts with Italian woes
* Euro zone periphery govt bond yields http://tmsnrt.rs/2ii2Bqr (Adds ECB inflation forecast reports, updates prices)
By Abhinav Ramnarayan
LONDON, June 7 (Reuters) - Italy's status as one of the euro zone's most vulnerable debt markets came into focus on Wednesday as the difference between its borrowing costs and those of its closest peer neared the widest since the bloc's 2011/2012 crisis.
The gap between Italy's 10-year bond yields and similarly rated Spain widened on investor concern that the heavily indebted country would struggle to deal with the withdrawal of European monetary stimulus, the country's ailing banking system and a potentially fractious set of snap elections.
The southern European neighbours are often compared in the bond market, and the difference in their government bond yields used as a measure of risk in the bloc.
As the Italian debt agency was marketing a sale of 30-year bonds, Italy's benchmark 10-year debt underperformed the rest of the euro zone bond market.
While the bond sale may have marginally exacerbated the effect, Italian yields have been rising in recent weeks on political worries, expectations of a move away from extraordinary European Central Bank monetary stimulus and concerns over banking system.
"The Italian long-end spreads are being hit by the 30-year deal, but overall it's more the focus on politics that is making the bonds weaker," said ING strategist Benjamin Schroeder.
"The Italian parliament is voting on a new electoral system which means we could have elections in September - that could coincide with the ECB's timeline for normalising its policy," he said.
The Italian 10-year yield spread over Germany, the benchmark for the region, widened to 201.5 basis points, the biggest gap since April 21.
The Italy-Spain bond yield spread, at 74 bps, was just 1 basis point off its March peak, when the gap was at its widest since the euro zone debt crisis in February 2012.
Italy's Constitutional Affairs Committee on Monday signed off on a new electoral law after the main parties reached a deal which could pave the way for a national election in the autumn.
In addition, the ECB meets on Thursday and is widely expected to take a small step towards normalising policy by ruling out the introduction of further stimulus.
Italy is seen as one of the biggest beneficiaries of the ECB's current ultra-loose policy.
Also the quick resolution of problems at Spanish lender Banco Popular contrasts sharply with the lack of progress to fix Italy's banking problems.
The European Commission approved the sale of Banco Popular to Santander as a way of preventing Popular going into insolvency.
In Italy, several banks are struggling with a bad loan crisis. Rescue proposals are yet to be approved because they may transgress rules preventing a state bailout of banks. The rescue of Banco Popular did not involve state aid.
Most high grade euro zone bond yields were flat in the morning session but pulled lower after Bloomberg reported the ECB was preparing to cut its inflation forecasts at this week's policy meeting due to weaker energy prices.
German Bund yields dipped to a six-week low of 0.25 percent .
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
(Reporting by Abhinav Ramnarayan, editing by Louise Heavens and Hugh Lawson)