* Italian 2, 5 yr yields rise over 20 bps in early trade
* Key Italian govt officials due to meet on budget
* NFPs due later in day, U.S. 10-yr yield below 3 pct (Adds partial recovery in Italian government bonds, adds U.S. employment data)
LONDON, Aug 3 (Reuters) - Short-dated Italian government bonds sold off for the second straight day on signs of deepening tension within the Italian government that are raising the prospect of new elections.
Prime Minister Giuseppe Conte had summoned top ministers to discuss next year's budget on Friday as investors concerned about Rome's spending plans sold Italian bonds and the national statistics bureau said the economy would keep slowing.
Conte said later the government had fixed the framework of its 2019 budget to be presented in September, and promised reforms that would ensure stronger economic growth.
Economy Minister Giovanni Tria is under pressure from within the government to ramp up spending and challenge European Union budget rules.
The possibility that he might be forced to resign has investors worried that Italy could go on a spending binge, or even that new elections could be triggered.
"Clearly, this is about the fear that Tria gets kicked out, which could lead to a collapse of the government, new elections, and the League gaining even further," said Commerzbank strategist Christoph Rieger.
"Or it may mean that they agree on a budget that's at odds with the EU, and plus just the pure supply effect of more borrowing."
At one stage, Italy's two-year and five-year government bond yields rose as much as 25 basis points to eight-week highs of 1.36 percent and 2.39 percent respectively. .
They found some support as the session wore on, and were up 1.07 percent and 2.15 percent at 1330 GMT, still around 10 bps higher on the day.
"An Italy two-year yielding more than 1 percent doesn't really make sense, that is a great buy opportunity. So someone woke up in the U.S., just saw it and bought it," a Milan-based government bond trader told Reuters.
"Not big orders, but enough to move this thin market," he added.
The closely-watched spread over Germany was still about 8 bps wider on the day at 251 bps .
"There isn't a huge amount of common ground between the two (coalition) parties and the potential for them to upset their European Union colleagues is very high," said Eoin Walsh, founding partner and portfolio manager at Twenty Four Asset Management, a bond fund with £13.5 billion of assets under management.
The fund added Italian BTPs in June after the initial spike wider in spreads and currently holds two-year and five-year debt. Walsh said he is waiting to see how the budgetary discussions proceed before acting on this position.
Also putting pressure on Italian yields are concerns over how rising Italian borrowing costs could affect the country's banks, which hold large amounts of government debt.
Shares in the Italian post office fell nearly six percent on Thursday and on Friday Monte dei Paschi di Siena shares fell 8 percent at one stage.
"The very high volatility in Italian BTPs is hurting the banks because of the high ownership of Italian government debt among banks, and it is increasing the contagion effect between the public and the banking sector," said Natixis fixed income strategist Cyril Regnat.
Also on Friday, U.S. job growth slowed more than expected in July likely due to companies' struggles to find qualified workers and the unemployment rate declined, pointing to tightening labor market conditions.
Yields held steady at recent lows, with 10-year U.S. Treasury yields lower a basis point at 2.97 percent.
Most high-grade euro zone bond yields were also lower on the day, with benchmark German 10-year government bond yields down 3 bps at 0.43 percent.
(Reporting by Abhinav Ramnarayan; Additional reporting by Virginia Furness and Giulio Piovaccari in MILAN; editing by Sujata Rao/Angus MacSwan/Alexander Smith)