LONDON, Dec 20 (Reuters) - Optimistic signals from two of the world's most influential central banks and a rescue plan for Italy's ailing lenders halted sharp falls in euro zone government bond yields on Tuesday.
Nerves around a faltering last-ditch private sector recapitalisation for Italian lender Monte dei Paschi and apparently politically motivated killings in Germany and Turkey pushed yields on Europe's safe haven benchmark Bund to two-week lows on Monday.
But comments by Federal Reserve chair Janet Yellen on the strength of the U.S. jobs markets followed by a more upbeat view of the economy from the Bank of Japan, appeared to kick the rally into reverse on Tuesday.
Analysts said the decision by the Italian government to seek parliamentary approval to borrow 20 billion euros to underwrite the stability of its banks, starting with Monte dei Paschi, was also helping soothe jittery markets.
German 10-year bond yields rose 2 basis points to 0.28 percent, while other euro zone equivalents were mostly higher on the day.
"The market is changing focus nowadays quite quickly," DZ Bank strategist Daniel Lenz. "Yesterday we had a lot of focus on Italy and now it is more the economic assessment that is driving things."
While Yellen didn't mention monetary policy in her speech to university students on Monday, she said graduates were entering the strongest jobs market in nearly a decade.
Some investors had been wary of Yellen potentially pouring cold water on market expectations for a faster pace of rate hikes next year, so her upbeat assessment of the economy brought relief.
Yellen's remarks were followed by a positive assessment of Japan's economic prospects from the BOJ. While the central bank kept monetary policy on hold on Tuesday, its comments reinforced market expectations that its future policy direction could be an increase - not a cut - in interest rates.
In the euro zone, a government bailout of Monte dei Paschi could come as early as this week, if the bank fails to pull off its own privately funded rescue plan.
While that appears to have calmed investor nerves for now, it could be tough for the week-old administration of Prime Minister Paolo Gentiloni, given that investors are required to bear losses under EU bailout rules.
Italian 10-year bond yields rose 5 basis points to 1.88 percent on Tuesday, edging away from one-month lows hit last week.
For Reuters new Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets (Editing by Jeremy Gaunt)