UPDATE 3-South European bond premiums near lows as investors lock in yields

* "Dovish taper" enhances appeal of these higher-yielding bonds

* Investors sitting on "carry" trade over the summer, analysts say

* Italy-Germany spread at tightest level all year at 152 bps

* Euro zone periphery govt bond yields http://tmsnrt.rs/2ii2Bqr (Updates prices)

LONDON, Aug 2 (Reuters) - The premiums investors demand to hold South European government debt over the German equivalent on Wednesday were close to their lowest levels in weeks as investors took more risks to try and lock in higher returns.

Euro zone government bonds in general and low-rated Southern European debt in particular were in demand this week after a rise in Spanish and Italian yields enhanced their appeal.

Lower bond supply and expectations that extraordinary stimulus will only be withdrawn gradually were also fuelling demand, analysts said.

"It is now too expensive to be short euro zone government bonds from an investor point of view. You would be foregoing all the carry," said ING strategist Benjamin Schroeder, referring to a strategy where investors borrow at a low interest rate and buy higher-yielding bonds.

"You would be better off waiting for two months when the taper strategy becomes clear before reconsidering your position," he said.

Most euro zone government bond yields have risen sharply since European Central Bank chief Mario Draghi signalled in late June that the bank was open to policy tweaks.

Expectations now are for the ECB to announce in the autumn that it will taper its 2 trillion euro bond buying scheme and then begin actual withdrawal in 2018.

Germany's 10-year borrowing costs doubled in the weeks following Draghi's speech on June 27.

Low-rated Italian, Spanish and Portuguese government bond yields also rose sharply over that period. But the high yields they now offer against a relatively benign political backdrop mean they became an attractive proposition for investors.

"We met some domestic Italian investors who said thanks to Mr Draghi, they can just sit on their Italian government bond positions over the summer and take all the carry," said Rabobank strategist Matt Cairns.

He said that expectations are for a "dovish taper" - a very gradual withdrawal of extraordinary stimulus.

The yield spread between the South European government bonds and the German equivalent is at some of the tightest levels in weeks.

The Italian government bond yield spread over Germany, for example, was close to its tightest level all year at 152 basis points, having hit that level on Tuesday.

Most euro zone government bond yields were flat to a touch lower on Wednesday.

That spread was as wide as 212 bps in April this year, at the height of concerns over elections in France and possible snap elections and Italy and implications of those events for the future of the single currency bloc.

However, as political risks died down, those moves began to reverse, while the ECB's cautious approach to policy tightening means the appeal of these "peripheral" government bonds has yet to fade.

Germany's debt management office sold 2.416 billion euros in a top up of its 0.50 percent, 10-year Bund at the lowest price of 100.13, the Bundesbank said on Wednesday.

The yield on the bonds were almost 1 basis point lower on the day at 0.48 percent.

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(Reporting by Abhinav Ramnarayan; editing by RLarry King)