* German bond yields rise sharply from the day's low after report
* Analysts say ECB is preparing market for tapering announcement
* Euro zone periphery govt bond yields http://tmsnrt.rs/2ii2Bqr (Adds quote, updates prices)
LONDON, July 13 (Reuters) - Germany's benchmark 10-year bond yield gave up all of its early falls and was back firmly above 0.50 percent on Thursday after a report that the ECB is likely to signal in September that its asset purchase programme will be gradually wound down next year.
According to a report in the Wall Street Journal, the European Central Bank will signal a tweak to its policy outlook at the Sept. 7 meeting.
"This is another story that suggests the ECB is going to prepare markets in the autumn for a tapering," said Rabobank fixed income strategist Lyn Graham-Taylor.
"We still think this is more likely to come in October but the market is reading it as sign that QE is going to come to an end, and so pushing bond yields higher."
Bonds across the euro zone came under fresh selling pressure after the report, with German Bund yields coming off a one-week low hit earlier in the session and then turning higher on the day. Near the close, it was up 2 basis points to 0.53 percent .
Earlier on Thursday, yields had dropped in a reaction to U.S. Federal Reserve chief Janet Yellen's comments on Wednesday that the Fed would not need to raise rates "all that much further" to reach current low estimates of the neutral fed funds rate.
But in Europe, expectations have ramped up that extraordinary monetary stimulus will end sooner rather than later, given impetus by a June 27 speech by ECB chief Mario Draghi in which he opened the door for policy tweaks.
This has prompted many investors to shed their holdings of euro zone government bonds, and yields have shot up in the past two weeks.
"We have a short position in German bunds as they look the most expensive along with Japanese bonds. Should market volatility rise, bond yields will rise faster than what most investors are positioned for," said James McAlevey, a fixed income portfolio manager at Aviva Investors.
At 0.52 percent, Germany's 10-year borrowing costs are more than double the level on June 27.
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 (Additional reporting by Saikat Chatterjee; Editing by Alison Williams)