UPDATE 1-Euro zone bond yields up sharply as market fortunes sour

* Euro zone bond yields edge up

* Bund yield up for first time in over a week

* Peripheral bond spreads wider after sharp tightening

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

LONDON, Nov 9 (Reuters) - Borrowing costs in the euro area rose sharply on Thursday as a broad-based rally in euro zone government bond markets that has dominated the past two weeks of trade appeared to stumble.

A European Central Bank decision on Oct. 26 to extend asset purchases well into September, albeit at a reduced monthly amount, has proved a powerful tailwind to bond markets, pushing bond yields from Germany to Portugal to multi-month lows.

Falling U.S. bond yields and benign inflation in both the U.S. and euro zone have added momentum to world bond markets.

But bond yields across the bloc turned tail on Thursday in a sign that investors are unwilling to push bond yields any lower without fresh drivers. Bond yields fall when prices rise.

European financial markets are not deep enough to allow ECB quantitative easing to run on indefinitely, ECB Executive Board member Benoit Coeure said on Thursday.

The euro zone economy will grow at its fastest pace in a decade this year, the European Commission meanwhile forecast, sharply increasing its projections from earlier this year.

Analysts said this could have added to the bond market sell off but added they were puzzled by selling across bond and stock markets as well as the U.S. dollar.

The euro climbed 0.4 percent to a six-day high of $1.1645 , having earlier traded flat and was set for its biggest single day rise in two weeks.

"There is a rather broad-based sell off in markets and we're wondering what is driving this," said DZ Bank rates strategist Christian Lenk.

Spain's 10-year bond yield rose 6 basis points to a two-week high at 1.55 percent, pushing the gap over top-rated German peers to 119 bps. The spread was at 107 bps earlier this week, its tightest in around six weeks.

Portuguese bond yields were up 8 bps at 2.09 percent , having hit their lowest level since April 2015 earlier this week.

Italian bond yields jumped 7 bps higher to 1.81 percent , pulling back from one-year lows. On Wednesday, they rose for the first time in just over two weeks, forcing the gap over German peers to widen from their tightest level in over a year.

"Maybe there's a bit of a view out there that it's as good as it's going to get in bond markets so it's worth taking a bit of profit," said Rabobank rates strategist Lyn Graham-Taylor.

Germany's benchmark Bund yield was set for its first daily rise in over a week.

The Bund yield was 4 bps higher on the day at 0.37 percent , up from a two-month low hit the previous session at around 0.31 percent.

"Bund yields at close to 0.30 percent shows we have come quite a long way given a brighter macro backdrop," said Commerzbank analyst Michael Leicester.

(Reporting by Dhara Ranasinghe; Editing by Alison Williams)