By Ana Nicolaci da Costa
LONDON, Aug 5 (Reuters) - Italian bonds rose on Monday on tentative signs of recovery in the euro zone while comments from centre-right leader Silvio Berlusconi soothed investor concern about the fragility of the ruling coalition.
Italy's services sector shrank in July at its slowest pace since going into a downturn in mid-2011, beating forecasts, and euro zone business expanded for the first time in 18 months in July, surveys on Monday showed.
Euro zone retail sales data is due later.
Supporters of Silvio Berlusconi protested in Rome on Sunday against the former premier's tax fraud conviction but he said he would continue to support the shaky coalition of his People of Freedom party and the centre-left Democratic Party of Prime Minister Enrico Letta.
Italian bonds have largely weathered the rise in political risk thanks in part to the attractive yield they offer and the support from the European Central Bank's bond-buying programme. .
Cash flow was also in Italy's favour. Barclays strategists expect Italian redemptions and coupon payments for the remainder of the year to be higher than the amount of bonds sold by 18 billion euros ($24 billion).
"There were fears that (Berlusconi) might attempt via his supporters to cause some problems and I think that political disruption has dissipated somewhat. Combined with the better data we are seeing in Europe, that is clearly helping sentiment in peripherals," Nick Stamenkovic, strategist at RIA Capital Markets said.
Ten-year Italian government bond yields fell 2.8 basis points to 4.26 percent. Equivalent Spanish yields were 2.4 basis points lower at 4.54 percent as Spain's services sector contracted in July at its slowest rate since June 2011.
German Bund futures rose 24 ticks to 142.84, extending Friday's gains when a weaker-than-expected U.S. jobs report pushed back some expectations that U.S. stimulus withdrawal would start in September. U.S. non-manufacturing activity data later on Monday will be scoured for any fresh signals on when "tapering" might begin.