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Italian yields near 3-year lows on hopes of new government

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

LONDON, Aug 27 (Reuters) - Italian government bonds rallied across the board on Tuesday with yields on benchmark 10-year debt falling to their lowest levels in nearly three years as hopes of a new government buoyed investor sentiment.

Appetite for risky assets has largely recovered over the past 24 hours and global stocks have pushed higher after U.S. President Donald Trump predicted a trade deal with China after positive gestures by Beijing.

Yields on benchmark 10-year Italian debt dived 10 bps in early London trading to 1.24%, the lowest since October 2016, fuelling a rally across peripheral European bonds.

"The news on the Italian political front was positive over the weekend and London traders are liking the news and we are seeing some more strength across the European bond market thanks to hopes of more ECB rate cut bets," said Peter Chatwell, head of rates strategy at Mizuho based in London.

The ruling 5-Star Movement and the opposition Democratic Party appeared on the verge of a deal to form a new Italian government on Monday after the PD indicated it had abandoned a veto on Giuseppe Conte serving another term as prime minister.

President Sergio Mattarella has given 5-Star a chance to avert a snap election by forming a new coalition with the PD. Last week he told them to report back by Tuesday, but on Monday he extended the deadline to Wednesday.

Core European government bond yields steadied as well with 10-year German bond yields holding firm at -0.68 bps, not far from a record low of -0.73 bps hit earlier this month.

Although yields on 10-year U.S. Treasury debt were a shade lower at 1.52%, they held firmly above overnight lows of 1.44%.

Global trade tensions have stoked concern about the growth outlook this year, pushing bond yields in the euro area deep into negative territory as investors bet on central bank action to shore up growth and inflation.

Investors have ramped up bets of more policy easing from the European Central Bank with money markets expecting about 13 bps in interest rate cuts at its next policy meeting in September. (Reporting by Saikat Chatterjee; Editing by Andrew Heavens)