lifeline@ (Corrects spread gap in paragraph six to five-week high)
* German plan to allow euro zone peers to tap ESM - Bild
* Italian bond yields fall back after Tuesday's rise
* Spanish, Portuguese yields also lower on day
* Euro zone periphery govt bond yields http://tmsnrt.rs/2ii2Bqr
LONDON, Aug 23 (Reuters) - Italian government bonds steadied Wednesday after a report that Germany is working on a scheme to let southern countries tap the euro zone's bailout fund for investment during downturns.
The yield on Rome's benchmark debt, which moves inversely to the price, jumped as much as 9 basis points to a three-week high of 2.13 percent on Tuesday on proposals to introduce a parallel currency in Italy which up the ante for elections due next year .
Yields fell back to 2.09 percent on Wednesday as analysts circulated an unsourced report in the German newspaper Bild on Germany's plan. If confirmed, it would mark a major change in policy for German Finance Minister Wolfgang Schaeuble, who has opposed transfers from richer to poorer euro zone states .
"Schaeuble has been the hard man of euro zone finance and all of a sudden he appears to be softening," DZ Bank strategist Andy Cossor said.
"I'm awaiting further developments before taking this proposal seriously, but in theory, if this turns out to be accurate, it could be a constructive factor for peripheral European spreads."
The spread between Italian and German 10-year bond yields grew to its widest level in five weeks on Tuesday. It narrowed slightly on Wednesday.
Yields on Portugal and Spain's 10-year bonds also fell slightly on Wednesday. Most other euro zone equivalents were flat.
There was little market reaction to a survey showing France's private sector maintained strong growth in August as factories boosted output at the fastest pace in more than six years.
A survey of Germany's private sector is due at 0730GMT and one on the euro zone at 0800GMT.
ECB President Mario Draghi is also scheduled to speak to an event in Germany before his appearance at a gathering of central bankers in Jackson Hole, Wyoming, later this week.
"We doubt that the ECB president will have anything substantially new to say ahead of the crucial ECB meeting on 7 Sep," RBC's global macro strategist Peter Schaffrik said.
"He is more likely to repeat the mantra of patience, persistence and prudence."
At the auctions, Germany is set to sell 3 billion euros of 10-year bonds.
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(Reporting by Jon Geddie, editing by Larry King)