worries@
* German Bund yield at 5-week low below 0.5 pct
Euro zone PMI weaker than expected
* Peripheral bond yields rise
* Euro zone periphery govt bond yields http://tmsnrt.rs/2ii2Bqr (Updates throughout)
By Dhara Ranasinghe
LONDON, May 23 (Reuters) - Most euro zone bond yields fell sharply on Wednesday, with Germany's long-term borrowing costs at 5-week lows after a business survey showed euro zone economic growth slowed much more sharply than expected in May.
As risk-off sentiment gripped world markets, peripheral bonds however, sold off with Italian bonds taking a fresh beating.
IHS Markit's Euro Zone Composite Flash Purchasing Managers' Index (PMI), seen as a good guide to economic health, sank in May to an 18-month low of 54.1 from 55.1, below all forecasts in a Reuters poll which predicted a dip to 55.0.
That followed weaker-than-expected PMIs in Germany and France, the two biggest euro zone economies, which alongside soft inflation suggested a stiffer policy challenge for a European Central Bank hope to exit monetary stimulus.
"We had expected some stabilisation (in the PMIs), clearly we have not seen that and the deceleration has increased downside risks to Q2 growth, which is a worry," said Peter Kinsella, senior currency and rates strategist at CBA in London.
"We had anticipated that the ECB would give us some forward guidance in June, they may put a hold on that or give just a modest form of guidance."
Ten-year bond yields in the single currency bloc, with the exception of southern Europe, fell 4-5 basis points.
Doubt over whether a North Korea summit next month would take place also gave investors another incentive to snap up German bonds - considered one of the world's safest assets.
Germany's Bund yield fell to 0.496 percent, its lowest level in five weeks.
But in the periphery, Portuguese and Italian bond yields rose.
Southern European bonds which have benefited the most were hit by signs of further of growth momentum slowing.
Italy, also whacked in the past week by concerns of a spend-thrift coalition taking shape in Rome, was seen as the most vulnerable.
Its 10-year bond yield was up 7 basis points at 2.40 percent , within sight of 14-month peaks hit the previous day.
"People who are willing to take a risk in the periphery argue that growth is good but they will question that if PMIs are weak," said Martin van Vliet, senior fixed income strategist at ING.
In Italy, the focus was on who will lead the coalition government proposed by the anti-establishment 5-Star and far-right League.
Giuseppe Conte, the little known academic proposed by the two parties to head a coalition government, has not yet been approved for the job by the head of state Sergio Mattarella.
Conte's attempt to become Italy's next prime minister also hit a hurdle on Tuesday following allegations that he had inflated his academic credentials.
On Tuesday, League leader Matteo Salvini said he would like to see eurosceptic economist Paolo Savona as economy minister in the government. (Reporting by Dhara Ranasinghe Editing by Catherine Evans and Andrew Heavens)