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UPDATE 1-German bond yields hit 18-month highs on stimulus shivers

* Euro zone periphery govt bond yields http://tmsnrt.rs/2ii2Bqr (Updates with latest price action)

LONDON, July 6 (Reuters) - Germany's 10-year government bond yield hit its highest level since January 2016 on Thursday, breaching 0.50 percent as investors fret over an unwinding of central bank stimulus.

Euro zone government bond yields were up sharply as investors braced for a signals from European policymakers that they will tighten monetary policy.

"This is all about Draghi's speech from last week - investors are simply positioning for tapering sooner rather than later," BBVA strategist Jaime Costero Denche said.

The market has been worrying over a potential tapering of the European Central Bank's two trillion euro bond-buying scheme since ECB chief Mario Draghi appeared to open the door to policy tweaks last week.

Although euro zone growth is accelerating, a "steady-hand" policy from the ECB is still needed to revive inflation, its chief economist Peter Praet said on Thursday.

Euro zone bond yields were up 5-8 basis points across the curve, with German five, 10 and 30-year government bond yields at their highest level since January last year.

The yields on Spanish, Italian and Portuguese 10-year government debt - seen as most vulnerable to a withdrawal of stimulus - were 7-9 basis points higher.

"The only thing I would say is - we don't know long (the move) is going to last this time. The ECB minutes could calm the market a bit," Costero Denche added.

The ECB is due to publish the minutes of its most recent policy meeting at 1130 GMT while German Bundesbank President Jens Weidmann and Austrian central bank governor Ewald Nowotny are due to speak later.

Minutes of the most recent United States Federal Reserve meeting kept U.S. Treasury yields pinned at recent highs overnight, with some policymakers favouring a reduction of the balance sheet with a couple of months.

"The bottom line is that more and more investors are growing confident that the Fed will continue its gradual tightening next year," said ING strategist Martin Van Vliet.

Yields may also be affected by large bond sales from France and Spain.

France sold 8.5 billions euros of bonds while Spain sold 4.3 billion euros of debt at auction.

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 Jeremy Gaunt and Alexander Smith)