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UPDATE 1-Italian yields rise amid bleak euro zone economic data

* Euro zone periphery govt bond yields http://tmsnrt.rs/2ii2Bqr (Recasts, adds latest data and news)

LONDON, Feb 14 (Reuters) - Italian government bonds underperformed the wider euro zone bond market on Friday as data confirmed the region's mediocre economic performance.

The German economy stagnated in the fourth quarter as both private consumption and state spending lost momentum, while euro zone growth only improved by 0.9% year-on-year last quarter, a smaller increase than in the previous three months when gross domestic product rose 1%.

The yield on the Italian 10-year government bond rose 2.6 basis points to 0.92%, mainly due to the bleak economic data, said Ralf Preusser, global head of rates research at Bank of America.

The appetite for Italian debt may have also have been impacted slightly by former Prime Minister Matteo Renzi saying Italy's government could collapse after his small party boycotted a cabinet meeting over a contested justice reform.

Preusser said a general theme in the debt world this year has been one of falling yields because "people are looking into government bond markets as a hedge to risk asset positions."

The trade where investors are long risk and long duration has done well so far this year, he said, adding that was why the bond market hadn't repriced as some other markets have.

Yields across other euro zone markets fell by around 1 bps, with the benchmark German 10-year Bund yield down 1.1 bps at -0.399%

Italy had led a rally in euro zone bond markets on Thursday, with 10-year yields hitting four-month lows on growing confidence that the European Central Bank will keep monetary policy easy for longer to protect the economy from the effects of the coronavirus.

The virus is so far confirmed to have infected 64,000 people, overwhelmingly in China, and killed 1,400.

A Reuters poll of economists indicated that the Chinese economy will grow at its slowest rate since the financial crisis in the current quarter under the effect of the virus.

Given that China is the world's second biggest economy, its stumble is likely to hold back growth elsewhere, prompting central banks to step in and inject further liquidity into financial markets, creating more demand for government bonds.

But the economists also said the downturn would be short-lived and the rebound quick if the outbreak was contained.

New cases outside China's Hubei region, the heart of the outbreak, declined for the 10th consecutive day on Thursday.

"Difficulties in assessing the (coronavirus) situation have resulted in volatile, but sideways, moves in rates," said Antoine Bouvet, senior rates strategist at ING.

"Recent days have proven that the case count should be taken with a pinch of salt, as it is inherently polluted by diagnostic difficulties," said Bouvet.

He said that, once the dust settled, investors would wake up to a fairly bleak overall macro environment, "one that does not justify divesting out of fixed-income products". (Reporting by Olga Cotaga; Editing by Kevin Liffey, Kirsten Donovan)