Wires

UPDATE 3-Italian bond yields spike, euro zone inflation expectations tumble

Yoruk Bahceli and Dhara Ranasinghe

* Italian short end takes big hit after lockdown in wealthy region

* Safe-haven German bond yields plunge to record lows

* Euro zone inflation expectations fall below 1% (Adds charts, Greek sell-off)

LONDON, March 9 (Reuters) - Italian bond yields soared on Monday while safe-haven German debt yields hit record lows and euro zone inflation expectations tumbled to unprecedented levels as a crash in oil prices amplified recession fears spurred by coronavirus.

A move by Saudi Arabia to raise crude output pummelled oil prices and heightened fears of a global recession plunged European stocks into a bear market on Monday.

The number of coronavirus cases spiked over the weekend, with both new infections and the death rate showing their largest daily increase in Italy - the current focus of the crisis - since the start of the outbreak.

Yields on Italy's government bonds shot up after the country ordered a virtual lockdown across much of its wealthy northern region.

Short-end bonds took the biggest hit. The two-year yield jumped as much as 56 basis points to 0.646%, the highest since June 2019. It was last up 34 basis points at 0.40% Italy's 10-year yield was last up 29 bps at 1.37%.

That pushed the gap between Italy and euro zone benchmark German 10-year yields - a key measure of risk - above 200 bps for the first time since August 2019.

"So far it was more a yield matter, not that much that impact on spreads was so high. From today on we see that this has changed," said DZ Bank strategist Daniel Lenz.

"The more the spreads widen, the more the impact also on the govvie sector, the higher the chance that, at least on a temporary basis, the ECB will also decide to increase APP (asset purchase programme) volume."

Many banks, in addition to the 10 bps rate cut money markets are pricing for the European Central Bank's meeting on Thursday, have revised their forecasts in recent days to include an increase to the purchases through corporate debt alongside a rate cut from the ECB..

After euro zone inflation expectations sank below 1% for the first time ever - far off the ECB's "below but close to 2%" target - money markets started to price two full rate cuts by the bank's June meeting, compared to one last week, and three by the October meeting.

Most German debt maturities fell to record lows on Monday . The two- to seven-year points on the German yield curve all plunged below minus 1% for the first time, while the 10-year Bund yield - the euro zone's leading safe asset - fell to a record low of -0.90%. It was last down 15 bps on the day at -0.88%.

Two-year yields are seeing their biggest daily fall since the euro zone debt crisis in 2011. The gap between two- and 10-year Bunds is at its tightest since 2008 .

"If they (ECB) do nothing then the yield curve could invert in Germany," said Peter Chatwell, Mizuho's head of rates strategy, referring to a key gauge that is usually taken as a sign of an upcoming recession.

Pledges by governments including Germany and Italy to increase spending to tackle the impact of coronavirus failed to soothe markets.

Germany promised aid to companies hit by collapsing demand . Italy's government will further increase spending in a "massive shock therapy", using the flexibility allowed by European budget rules in full.

Southern European debt sold off more broadly on Monday, with 10-year Greek yields jumping as much as 50 basis points to 1.91%, the biggest daily rise since June 2016. They were below 1% just weeks ago.

Spanish 10-year yields rose much less, up 4 bps on the day, but the gap between the country and Germany's 10-year yields widened to 110 basis points, its widest since April.

(Reporting by Yoruk Bahceli and Dhara Ranasinghe; Editing by Emelia Sithole-Matarise, William Maclean)