UPDATE 4-Italian bonds in demand as green shoots of growth emerge

* Italian growth will allow it to keep debt in check, analyst says

* Euro zone growth revised upwards, pushing yields higher

* Graphic: Italy-Germany bond yield spread narrows to 159 bps

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

LONDON, Aug 16 (Reuters) - The gap between Italy's and Germany's bond yields narrowed on Wednesday as Rome posted healthy growth numbers that should help keep its high debt levels in check.

Italy's economy maintained firm growth in the second quarter, in line with expectations, thanks to healthy domestic demand which offset a negative contribution from trade, data showed on Wednesday.

"It will really help bring down the debt-to-GDP ratio, which is one of the key drivers of the (Italy-Germany) spread," said ING strategist Martin Van Vliet.

"We still expect the spread to widen out to over 200 bps ahead of next year's elections, but the growth momentum will certainly help keep that down."

The gap between Italian and German 10-year borrowing costs, an indicator of risk sentiment in the euro zone bond market, narrowed by as much as 3 basis points to 159 bps on Wednesday.

At that level, the spread is 50 basis points below some of the widest levels seen earlier this year, when French elections and the prospect of snap Italian elections weighed on the market.

The difference between Italian and German borrowing costs is driven by a number of factors, including the credit rating of the two countries, political risk and concerns over the Italian banking sector.

But underpinning these is Italy's high debt levels and its hitherto flatlining economy; the country went through a two-year recession following the debt crises of 2010-2012.

At 132.6 percent at the end of 2016, Italy's debt-to-GDP ratio is still the highest in the euro zone after Greece and amongst the highest in the world.

"But if you are seeing some growth returning, that would be encouraging for Italy and the debt-to-GDP ratio can be brought under control," said Van Vliet.

High-grade euro zone bond yields dipped in early trade on reports that European Central Bank President Mario Draghi will not deliver a new policy message at the U.S. Federal Reserve's Jackson Hole conference.

Soon after, however, data showed euro zone growth expanded by more than previously forecast on an annual basis, pushing yields higher across the board.

The yield on Germany's 10-year government bond -- the region's benchmark -- hit a one-week high of 0.46 percent, before closing some 1 bps higher on the day at 0.44 percent.

Later on Tuesday, the U.S. Federal Reserve is due to release the minutes of its July policy meeting, and the market will be looking for any signs of when it will begin the process of unwinding a balance sheet that has swelled through years of post-crisis money printing.

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 Janet Lawrence)