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UPDATE 2-Euro zone bond yields rise as ECB's Draghi stresses need for fiscal push

Dhara Ranasinghe

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* Draghi: may need stimulus for long time if no fiscal boost

* Data from Spain and German states points to weak inflation

* Italy bond market set for best quarter since 2012 (Updates prices, adds revision of German growth forecast, analyst comment, ESTR)

LONDON, Sept 30 (Reuters) - Euro zone bond yields edged up on Monday after European Central Bank President Mario Draghi again emphasized the need for fiscal policy to support the bloc's long-term growth prospects.

In an interview with the Financial Times, Draghi said that the need for fiscal policy as a complement to monetary policy was now more urgent than before.

The ECB unleashed a fresh round of stimulus on Sept. 12, but concern is growing that it is reaching the limits of what it can achieve without governments doing more through fiscal policy.

This has contributed to selling in higher-rated debt markets such as Germany, France and the Netherlands.

Long-dated bond yields in Germany and France have risen about 15 bps this month, set for their biggest monthly rise since early 2018.

They rose to a one-week high, up 2 to 3 basis points on the day after weak inflation prints from Spain and Germany limited the sell-off in bond markets that followed Draghi's comments.

Germany's 10-year benchmark was flat on the day at -0.57%. .

Jean-Christophe Machado, fixed-income strategist at Natixis, said he expects euro zone inflation figures due on Tuesday to also disappoint.

Meanwhile, Germany's leading economic institutes revised down their growth forecast for Europe's biggest economy for this year.

"If the data worsens they will have to do something 1/8increase fiscal stimulus 3/8 because they won't be able to take the risk to lose their leadership in Europe," Natixis' Machado said.

A key market gauge of long-term inflation expectations in the single currency bloc fell to 1.164%, its lowest level since early July, after the Spanish and German data.

As the third quarter drew to a close, Italy stood out as the bloc's best-performing bond market.

Italy's 10-year bond yield is down 22 bps this month at 0.82% and a hefty 127 bps this quarter - set for its biggest quarterly slide since early 2012.

The formation of a new coalition government comprising the 5-Star Movement and pro-European Democratic Party in August has dispelled near-term election risks, driving investors into one of the few positive-yielding bond markets in the single currency bloc.

Italy is also seen as a key beneficiary of the latest ECB stimulus, which includes open-ended asset purchases, while concerns about the country leaving the bloc have fallen away.

Italy's economy minister suggested on Sunday that the country's budget deficit would be set at about 2.2% of domestic output next year, emphasizing the need for flexibility as Rome tries to rekindle stalled growth without reigniting friction with the EU.

"The Italian coalition has been taken relatively well, but it is very important to watch the internal discussions on the budget," said Ross Hutchison, a fixed-income fund manager at Aberdeen Standard Investments.

Analysts said the key focus this week is on the launch of the euro short-term rate ESTR, a new inter-bank lending rate which will be published for the first time on Wednesday, as the ECB ceases to publish EONIA, the current overnight benchmark.

(Reporting by Dhara Ranasinghe in London Additional reporting by Yoruk Bahceli Editing by David Goodman and Matthew Lewis)