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UPDATE 1-German bond sell-off pauses as multi-year-high yields attract some investors

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* German 10-year yield now 8 bps off last week's high

* Most core euro zone yields 1-2 bps lower on day

* Italy prepares for sale of bonds including 30-year

* Euro zone periphery govt bond yields http://tmsnrt.rs/2ii2Bqr (Updates prices, adds new quotes, UK inflation, auction results)

LONDON, Feb 13 (Reuters) - German government bonds were in demand on Tuesday as recent multi-year highs on yields on either side of the Atlantic proved attractive for some investors.

Yields have risen across major developed markets on a recovering global economy and on expectations that central banks will tighten policy faster than previously thought.

However, this means that high-grade bonds now have moved to attractive yields in a very short period of time and this would still create demand on some days when economic and policy news is thin, analysts said.

"The momentum is still for upward pressure on bonds' yields, but the market is taking a breather for now," said ABN AMRO senior fixed income strategist Kim Liu.

Germany's 10-year government bond, the benchmark for the bloc, fell by 3 basis points to 0.727, coming further away from the 2-1/2 year high of 0.81 percent hit last week.

The decline followed a fall in the yield on 10-year U.S. Treasuries by three bps to 2.82 percent, moving away from four-year highs hit on Monday.

"Treasury yields drifted lower overnight as markets seemed unimpressed by President Trumps proposal to take an additional decade to balance the US budget and spend US$200bn on infrastructure," ING strategists said in a note.

U.S. President Donald Trump proposed a budget on Monday that calls for cuts in domestic spending and social programs such as Medicare and seeks a sharp increase in military spending and funding for a wall on the Mexican border.

German 10-year borrowing costs have risen sharply over the past two months, more than doubling from the 0.307 percent level in early December.

Most other better-rated euro zone bond yields were also down 1-2 bps. Italy kicked one of the most hefty weeks of supply this year so far by selling 7.677 billion euros in bonds maturing in 2020, 2024 and 2048, with strong demand from investors.

The yield on this debt has actually fallen since the start of the year as investors pick up the extra yield on offer, ignoring upcoming political risk as the country prepares for a general election on March 4.

Overall this week, analysts are expecting over 20 billion euros of supply from euro zone governments.

Italy's 10-year bond rose 2.5 bps to 2.052 pct after the auction, while the 30-year was up 4 bps at 3.105 pct.

Elsewhere, Britain's 10-year gilt inched lower on the day, while the 2-year gilt was up nearly 2 bps at 0.70 percent, as data showed British inflation unexpectedly held close to its highest level in nearly six years in January, firming up investors' bets that the Bank of England will raise interest rates again in May.

The BoE surprised financial markets last week by indicating that rates could move up faster than previously expected, as the Bank wanted to bring inflation back to its target of 2 percent within two years rather than three.

(Reporting by Fanny Potkin and Abhinav Ramnarayan, additional reporting by Dhara Ranasinghe; Editing by Raissa Kasolowsky)