UPDATE 1-Southern European yields drop as political risk fades

* Italian and Spanish government debt outperforms

* German, Irish political outlook improves

* Fed chair nominee Powell expected to tow the Yellen line

* Euro zone periphery govt bond yields http://tmsnrt.rs/2ii2Bqr (Adds graphic, updates prices)

LONDON, Nov 28 (Reuters) - South European government bonds outperformed on Tuesday as fading political risk added to the benign outlook for the bloc and gave investors more reason to buy riskier, lower-rated debt.

Germany's two largest parties are expected to begin talks for a potential "grand coalition", while the resignation of Ireland's deputy prime minister suggested a snap election that could have threatened Brexit negotiations would be avoided.

"The news this weekend of the grand coalition in Germany is positive for peripheral spreads," said Rabobank strategist Lyn Graham-Taylor, referring to the bond yield spread between low-rated Southern European countries and the benchmark German equivalent.

"On the margins, the news around the Irish election may also be giving them a boost," he said.

In addition, French consumer confidence topped forecasts in November while the positive mood among German shoppers was unchanged heading into December.

Italian and Spanish 10-year government bond yields were lower 2 basis points each, while benchmark German 10-year yields were unmoved.

Apart from the reduction in political risk, the pro-business FDP party have traditionally taken a tough stance on the indebted Southern European countries. The fact that a "grand coalition" would exclude them is also positive for Italy, Spain and Portugal.

Outside of Europe, investors will also pay close attention to Federal Reserve chair nominee Jerome Powell, with his confirmation hearing expected later on Tuesday.

Powell has already made remarks supportive to current Fed chief Janet Yellen, saying the Fed's easy money policy has paid off by bringing millions back to work without any clear sign it has thrown markets off kilter.

"Overall this fits with the view that Powell will not differ dramatically from Yellen on monetary policy but is likely to be keener than her to reduce the regulatory burden on banks," Rabobank strategists said in a note.

It is also an important week for tax overhaul plans in the world's biggest economy.

A U.S. Senate Republican tax bill strongly backed by President Donald Trump faced potential opposition on Monday from two Republican lawmakers who could prevent the sweeping legislation from reaching the Senate floor.

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(Reporting by Abhinav Ramnarayan; Editing by Alison Williams)