Italian yields hover at 3-month lows as traders eye talks in Brussels

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

By Olga Cotaga

LONDON, July 7 (Reuters) - Italian 10-year government bond yields were clinging to recent three-month lows on Tuesday as traders awaited signs of progress from talks this week in Brussels on a European recovery fund.

On Wednesday, German Chancellor Angela Merkel will travel to Brussels to further discuss the fund. Investors in Italian bonds hope it will be given as grants rather than loans, helping an economic recovery in southern European countries and removing worries that they could be saddled with even more debt.

"We currently have some thoughts and hopes that there could be a breakthrough concerning the recovery fund," said Daniel Lenz, rates strategist at DZ Bank, adding that the European Commission is planning to release an updated proposal for the recovery fund.

Some European countries such as Austria have raised concerns about the 750 billion euro fund being offered as grants rather than loans.

Investors are waiting "for more news from Brussels to come to have a clear view whether there will be a breakthrough... during the European summit, which is due on July 7," Lenz said.

Italian 10-year BTP yields were last trading down 1.7 basis points at 1.29%, not far from 1.25%, the three-month low they last fell to on Friday.

German 10-year Bund yields also fell by 1.5 bps to -0.448% , having touched earlier a six-day low of -0.457%.

Elsewhere, Austria and Germany were due to issue bonds in the primary market on Tuesday. Austria will carry out 10-year and 50-year bond auctions, while Germany plans to issue a 10-year inflation-linked bond. (Reporting by Olga Cotaga Editing by Peter Graff)