* Italians state bailout seen after rescue plan falls short
* Spanish banks could face 4 bln euro payout after ECJ ruling
* Bond yields rise broadly after U.S. growth data (Updates prices for close)
By Abhinav Ramnarayan
LONDON, Dec 22 (Reuters) - Southern European government bond yields rose on Thursday as Italian lender Monte dei Paschi appeared on track for a state bailout, shining a spotlight on the region’s struggling banks.
Italian and Spanish yields were the fastest risers in a broad bond market sell-off exacerbated by strong U.S. GDP data that could support a faster pace of monetary tightening in the world’s largest economy next year.
Investors were also fretting about Spain’s banks, which could be facing more than 4 billion euros of costs after a European court ruling on a disputed mortgage clause.
In Italy, Monte dei Paschi’s board was expected to approve a request for state aid later on Thursday, after it raised less than half the 5 billion euros ($5.2 billion) it needs by the end of the year.
A failure of the country’s third largest lender, which has been in crisis mode for years, would threaten the savings of thousands of Italians, and a government bailout might not protect them entirely.
Italy’s 10-year government bond yield rose 4 bps to 1.86 percent, while the Spanish equivalent rose a similar amount to 1.41 percent by 1600 GMT.
All other euro zone bond yields were up 1-3 bps on the day.
“A bailout in itself is good news, but the big question is whether it is in line with European law,” DZ Bank strategist Daniel Lenz said. “It’s an open question whether there will be a solution everybody is fine with.”
Under EU bailout rules, investors must bear some of the losses before taxpayer money can be used to save a bank.
Rabobank strategist Lyn Graham-Taylor said the prospect of a state bailout was one reason why losses on Italian bonds had been modest.
“It may even prove a blessing in disguise if this means we start dealing with the NPLs problem at Monte dei Paschi and some of the smaller (Italian) banks,” he said, referring to the high ratio of non-performing loans in the country’s banking sector.
Data on Wednesday showed that the U.S. economy grew faster than initially thought in the third quarter, notching its best performance in two years, which pushed U.S Treasury yields and euro zone equivalents broadly higher.
The Fed last week hiked rates for the first time in 12 months and signalled three further hikes in 2017 if economic conditions allow.
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 (Reporting by Abhinav Ramnarayan; Additional reporting by John Geddie; Editing by Robin Pomeroy and John Stonestreet)