* Worry over Italian political deadlock weighs on euro
* Italian bond yields ease to 4.75 percent
* European shares gain on confidence in central bank support
* U.S. stocks seen extending recent rally
By Richard Hubbard
LONDON, Feb 28 (Reuters) - Italian government bond yields
edged lower and shares rose on Thursday as worries about Italy's
political stalemate were offset by confidence the European
Central Bank would lend support if the crisis was to worsen.
Reassuring commitments from U.S. Federal Reserve Chairman
Ben Bernanke on its stimulus plans reinforced investors' belief
that major central banks will continue with steps to support the
U.S. stock index futures pointed to a flat opening on Wall
Street following a sharp two-day rally, with investors closely
watching developments in Washington for signs of a last minute
deal to avoid major spending cuts beginning on Friday.
But the biggest fear is that political instability in Italy,
the euro zone's third-largest economy, could reignite the bloc's
crisis, now in its fourth year. Some have questioned whether the
ECB's September pledge to help struggling member states which
ask for aid can be utilised if there is no workable government.
"There will be a risk premium on Italian yields until a new
government is formed and we know what they're going to do with
structural and fiscal reforms," said Nick Stamenkovic,
strategist at RIA Capital Markets.
"But we're not going to see a return to the levels we saw a
year ago because the ECB has pledged to use its balance sheet if
Ten-year Italian bond yields were down about four basis
points at 4.78 percent by midday. The yield has
risen 46 basis points in February, however, the first
significant monthly rise in Italy's indicated borrowing costs
since ECB President Mario Draghi promised in July to do whatever
was needed to prevent a breakup of the euro.
Concerns about Italy weighed on the euro, which was down 0.2
percent on the day at $1.3109. The currency was expected
to remain weak although it has recovered from sharp falls which
took it to a near an eight-week trough of $1.3018 on Tuesday.
"We have got a lot of Italian election uncertainty in the
next two to three weeks ... which doesn't sound like it is going
to be good for the euro," said Chris Turner, head of FX strategy
German bond futures, a barometer of safe-haven demand, also
trimmed early losses, indicating that euro zone concerns were
not far away. The main Bund futures contract was four
ticks higher on the day, having earlier lost around 13 ticks.
Some bond investors remain worried that the ECB's ability to
respond to problems in Italy may be limited, adding to concerns
about an already weak regional growth outlook.
"I can't see any game-changing growth numbers, I can't see a
policy response to the Italian elections from the ECB, and I
can't see any imminent headlines from Italy that will suggest
some progress," said Jack Kelly, Investment Director, Global
Government Bonds at Standard Life Investments.
Equity markets meanwhile were enjoying support after
Bernanke's comments on further stimulus and a widely expected
move by Japan's prime minister to nominate a strong supporter of
loose monetary policy to lead the Bank of Japan.
The MSCI's world equity index rose 0.4
percent after a strong session across Asia which was supported
by signs of economic growth in Japan after showed a pick up in
Europe's broad FTSE Eurofirst 300 index had risen
around 0.5 percent by midday, lifted by a fall in euro zone
inflation which left the door open for the ECB to consider a
rate cut when it meets next week.
London's FTSE 100, Paris's CAC-40 and
Frankfurt's DAX were between 0.1 and 0.6 percent
Following a long unbroken run of gains in the second half of
last year and in January thanks to aggressive support from the
world's major central banks, many equity markets have undergone
a correction in February.
The broad FTSEurofirst 300 is on track for its first
negative month since May last year, while the MSCI World index
is likely to see its first setback since last October.
By contrast the dollar has had its strongest month
since last May as investors keen to cash in on improving U.S.
growth prospects - and those looking for safety in case euro
zone tensions return - have bought into the greenback.
Commodities were also generally firmer due to the
expectations of ongoing monetary easing, which encourages buying
from investors looking for higher returns and raises the
prospect of greater demand as economic activity picks up.
Brent rose 0.4 percent at $112.36. though U.S. crude
fell 1 cent to $92.75 and was on track for an almost 5
percent drop this month after three straight monthly gains.
Gold was headed towards its longest run of monthly declines
in more than 16 years, as the improved economic backdrop and
lower inflation concerns blunt its appeal to investors.
Spot gold fell 0.4 percent to $1,590.91 per ounce,
while U.S. gold futures for April delivery fell 0.5
percent to $1,588.