* Italy pressured as PM Monti enters labour talks * Focus on fiscal slippage halts selloff in Bunds * PMI data in focus, may spur peripheral growth worries By William James and Emelia Sithole-Matarise LONDON, March 20 (Reuters) - Italian bonds came under pressure on Tuesday as the prime minister met unions over labour reforms, bringing worries about fiscal slippage in the region's weaker states to the fore and calming a recent resurgence in risk appetite. The move away from riskier euro zone bonds helped German Bunds to stabilise after a steep rise in yields last week, though traders said the momentum behind a U.S.-led safe-haven selloff could still carry yields higher in the short term. Driven by the renewed focus on the difficulties of implementing reforms, bonds issued by Spain and Italy underperformed Germany on the day as Italian Prime Minister Mario Monti entered crucial talks with labour unions. "Labour market reforms are absolutely pivotal to improving the medium-term growth outlook which has been very poor recently," said RIA Capital Markets strategist Nick Stamenkovic. "So if we see signs of further structural reforms going in place that will help Italy, but if we see signs that Mr Monti starts to water down structural reforms the market will take that very badly and Italian bonds will come under pressure." Italian 10-year yields were last up 7 basis points at 4.91 percent while the equivalent Spanish yield was up 6.4 bps at 5.24 percent The underperformance was also fuelled by a warning shot about Spain's fiscal outlook, which helped underscore the long-term challenges facing the euro zone's debt-laden sovereigns. Some strategists expect Italy to keep outperforming Spain after data showed Spanish banks' bad loan rates rose in January to their highest since August 1994, suggesting the sector is not yet out of the woods. "We're quite constructive still on Italy," said UBS strategist Gianluca Ziglio. "If we get a smooth process in terms of the labour market reform then there's no reason why BTPs shouldn't tighten even more against Bunds and outperform Spain as well because we think the Spanish problem is much more important and relevant than issues in Italy." HIGHER GERMAN YIELDS? After a choppy session, June Bund futures settled 4 ticks higher on the day at 135.64 while the 10-year German cash yield was flat at 2.04 percent, retreating from this year's high of 2.07 percent reached last week. Nevertheless, market participants saw scope for the Bund yield to carve out a new range above the 2 percent barrier which had kept a firm lid on yields this year until upbeat U.S. data and a selloff in U.S. Treasuries forced a break of that level. "My view is that we've turned in yields - two percent now should be decent support, and then we're looking to trade the 200-day (moving average) at 2.12 percent at least and even up to 2.30. We're looking to sell any rallies," a trader said. However, that outlook remained vulnerable while the euro zone continued to demonstrate a varied economic performance across its countries compared to the strengthening U.S. picture. That threw the focus on March purchasing managers' index data due on Thursday which could undermine the move away from safe havens if it supports the view that growth is only strong in the region's highly-rated countries. "Even if PMI data come in a little bit stronger for the likes of Germany, the importance of the Spanish and Italian figures is disproportional," said Elisabeth Afseth, fixed-income analyst at Investec.