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UPDATE 1-Euro zone bond yields creep up, Draghi says ECB policy working

* Euro zone bond yields creep up

* Euro hits 2-1/2 year high vs dollar

* Draghi says ECB policy is working

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

LONDON, Aug 28 (Reuters) - Government bond yields in the euro area crept higher on Monday in the absence of any major policy cues from top central bankers at a gathering in Jackson Hole, Wyoming at the end of last week.

Federal Reserve Chair Janet Yellen did not mention monetary policy in a highly anticipated speech at Jackson Hole.

European Central Bank chief Mario Draghi, speaking late on Friday, said ECB policy is working and the euro zone's economic recovery has taken hold even if more time is needed to lift inflation to the bank's 2-percent target.

The euro climbed to a 2-1/2-year high near $1.20 after Draghi held back from talking down the currency in his speech.

There had been some speculation that Draghi could use the opportunity to tame a strong euro, which hurts exporters and helps dampen inflation by keeping down the price of imported goods.

Bond yields were 1-2 basis points higher across the euro zone, although trade was thinned by a public holiday in Britain.

German 10-year bond yields rose 1 bps to 0.39 percent , just off eight-week lows hit last week at 0.37 percent.

"Most investors had hoped for more hints about the monetary policy outlook but there was nothing on this front from Draghi," said DZ Bank rates strategist Daniel Lenz. "There is a risk that yields turn higher from here."

After a summer lull, supply from euro zone governments picks up this week and is expected to put some upward pressure on bond yields as investors make way for new bond issuance.

Italy sold 2 billion euros of bonds maturing in 2019 on Monday..

Germany is scheduled to sell 5 billion euros of two-year bonds on Tuesday.

This week also sees the release of key economic releases such as German inflation data and U.S. employment numbers.

The ECB meets next week and with market focus returning to the timing for a scaling back of the central bank's bond-buying scheme, lower-rated bond markets fell under selling pressure last week. "A likely drop in euro area core inflation and euro strength add juice to next week's (ECB Governing)Council discussions," analysts at Commerzbank said in a note.

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 Dhara Ranasinghe; Editing by Toby Chopra)