* Italy’s bond yields rise on Di Maio threat
* Markets on edge as Italy budget talks face crunch point
* German Bund yield tests 0.50 pct again (Adds details, background comment)
By Dhara Ranasinghe and Virginia Furness
LONDON, Sept 20 (Reuters) - Italian bond yields rose on Thursday, reversing earlier falls in a move analysts attributed to a threat from the 5-Star Movement’s Luigi di Maio to quit the coalition if the party’s spending demands in the 2019 budget are not met.
“If we do not find the resources we better go home. It is useless to chug along,” Di Maio told Italy’s Radio 24.
Italy’s Economy Minister Giovanni Tria has to set growth, deficit and debt targets for next year’s budget by Sept. 27.
Tria, an academic and member of neither of the two ruling parties, is locked in a tug-of-war with the anti-establishment 5-Star and right-wing League, who want major spending on their flagship campaign promises amid flagging growth.
As the key budget deadline draws closer, Italy’s bond market is showing a heightened sensitivity to headlines from the euro zone’s third biggest economy.
The news about Di Maio’s comments pushed Italian bond yields up across the curve, erasing earlier falls .
The selloff was most pronounced among shorter-dated bonds, with two-year yields last up 12 basis points on the day at 0.85 percent — taking its rise over the past two sessions to 22 bps.
Five-year bond yields were up 9 bps at 1.94 percent , while 10-year yields were 4 bps higher at 2.90 percent.
“They (5-Star) haven’t threatened to cause the government to collapse before, so this is new,” said Richard McGuire, head of rates at Rabobank in London, referring to the Di Maio comments.
“Previously there was some horse trading going on and Tria was maintaining some control, but it appears that 5-Star are willing to sacrifice the government rather than cede ground.”
He added that the upshot of this could be that Italy’s government settles for a higher-than-anticipated budget deficit.
Italy’s ruling parties want to spur economic growth by setting next year’s budget deficit target at more than 2 percent of annual output, a level that clashes with European Union commitments and may boost the country’s mammoth debt.
Tria reassured the European Commission this month that he would stick to goals that would improve the public finances.
As Italian bonds came under renewed selling pressure, yields on safe-haven German bonds fell, dragging most other euro zone bond yields with them.
Germany’s benchmark 10-year Bund yield was down 1 basis point at 0.48 percent, having briefly touched more than three-month highs just above the key 0.50 percent level as U.S. 10-year Treasury yields rose to four-month highs.
Additional reporting by Giselda Vagnoni, Editing by Sujata Rao and Ed Osmond