UPDATE 1-Political worries push up Italian bond yields; ratings upgrade helps Spain


* Euro zone periphery govt bond yields http://tmsnrt.rs/2ii2Bqr

LONDON, March 26 (Reuters) - Italian bond yields rose on Monday, underperforming most of their euro zone peers, on further signs the anti-establishment 5-Star Movement and the anti-migrant League might explore an alliance to form a government.

Most bond yields in the euro area were up in early trade after falling last week, with Spanish bond yields close to 15-month lows after a ratings upgrade by S&P Global on Friday to A- from BBB+.

Italy was the bloc's laggard, with yields rising as weekend political developments raised the prospects of a coalition government between far-left and far-right parties.

The head of the 5-Star Movement at the weekend praised the League's leader, Matteo Salvini, after the two parties agreed a deal to elect parliament's speakers.

Asked whether his movement could side with the League to form a government, 5-Star's Luigi Di Maio did not rule anything out.

An election on March 4 ended in a hung parliament, with the 5-Star becoming the largest party and a rightist alliance, including the League and former prime minister Silvio Berlusconi's Forza Italia party, emerging as the biggest bloc.

"The risk is still that we see a coalition between far-left and far-right and the probability of that is now higher," said Sebastian Fellechner, a rates strategist at DZ Bank.

"That is a factor that could increase risk aversion for investors."

Italy's 10-year bond yield rose as much as 5 basis points in early trade to 1.92 percent, pushing the gap over benchmark German Bund yields to 139 bps from around 134 bps on Friday. In contrast, Spain's 10-year bond yield was flat at 1.26 percent after Friday's upgrade.

S&P Global said its upgrade for Spain reflected a positive outlook for the economy and budgetary consolidation .

It was the second upgrade for Spain into single-A territory this year, allowing the bond market to brush off political developments of its own over the weekend.

Former Catalan leader Puigdemont was detained in Germany on Sunday, five months after entering self-imposed exile from Spain, where he faces up to 25 years in prison for organising an illegal secession referendum last year.

Twenty-five Catalan leaders will be tried for rebellion, embezzlement or disobeying the state, Spain's Supreme Court ruled on Friday - a sharp escalation of legal action against separatists in the northeastern region.

"The rating upgrade was positive and I expect spreads would tighten further. I don't think the Catalonia news will impact the markets," said Fellechner. (Reporting by Dhara Ranasinghe, editing by Larry King)