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* Italy set for biggest weekly fall in yields in 6 wks
* Spain 10-year bond yield close to lowest since 2016
* EZ flash CPI, US NFP due out
* Euro zone periphery govt bond yields http://tmsnrt.rs/2ii2Bqr (Updates prices)
LONDON, May 3 (Reuters) - Spain's 10-year bond yield gap over safer Germany was at its tightest in almost nine months on Friday, while Italian borrowing costs were set for their biggest weekly fall in six weeks in a sign of improved sentiment towards the periphery.
Bond yields in the likes of Germany, France and the Netherlands edged higher as data showed a rise in euro area inflation and Bundesbank President Jens Weidmann expressed scepticism about a proposal to grant banks some relief from negative central bank interest rates.
But as the week draws to a close, it was the move in southern European bonds that stood out.
Relief that S&P Global kept Italy's ratings unchanged last Friday and Sunday's election in Spain passed without any major upsets, sparked a fall in bonds yields and rise in prices at the start of the week.
That move gathered pace as data lifted hopes of a recovery for regional economies: the Spanish manufacturing sector for instance expanded in April at its fastest rate since January, data showed on Thursday.
"Near-term, this dynamic (in the periphery) looks set to extend," said Christoph Rieger, head of rates at Commerzbank.
"This week's GDP data was better than expected and PMIs show improvements in the periphery while Germany has faltered."
Spain's 10-year bond yield hovered near its lowest since late 2016, a level hit on Thursday at around 0.97 percent .
As benchmark German bond yields inched up to 0.04 percent , the Spanish/German 10-year bond yield narrowed to around 94 bps - its tightest in almost nine months , before closing the day at around 99 bps.
Italy's 10-year bond yield was marginally higher at 2.56 percent, near over two-week lows hit the previous day.
James McCormick, global head of desk strategy at NatWest Markets, said he was bullish on Spain long-term and started selling German Bunds last week.
"In Europe, we're long Spain versus Germany and France," he said. "With that you get the best-performing economy of the majors in the euro zone and we're past the event risk of the election."
Other analysts noted big flows into peripheral bonds this week, which they suspected was cross-asset investors shifting funds from equity to fixed income markets.
Data showed euro zone inflation accelerated to 1.7 percent in April from 1.4 percent a month ago, beating expectations.
German bond yields rose ahead of the data, with an inflation rise anticipated after strong German numbers earlier this week, before easing back slightly.
"I wouldn't get too excited about the inflation numbers as they reflect the timing of Easter and they should slip back," said Chris Scicluna, head of economic research at Daiwa Capital Markets.
(Reporting by Dhara Ranasinghe; Additional reporting by Josephine Mason; Editing by Raissa Kasolowsky and Susan Fenton)