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UPDATE 2-Southern European bond yields keep near post-ECB lows; Euribor rates hit record lows

* Euro zone periphery govt bond yields (Adds details, updates prices)

LONDON, Oct 30 (Reuters) - Southern European government bond yields kept near recent lows on Friday as markets focused on stimulus the ECB will deliver in December, which overshadowed news that Spain became the latest European country to impose tougher rules to curb the spread of the coronavirus.

Spain will be under a state of emergency until early May, giving regions legal backing to decide curfews and restrict travel to try and contain rampant COVID-19 contagion.

Bond yields in Spain and Portugal, however, held near 10-day lows hit on Thursday, when the European Central Bank clearly signalled it will provide more stimulus at its next meeting to contain the growing fallout from a second wave of infections.

Spanish and Portuguese 10-year bond yields were last unchanged on the day around 0.14% and 0.12% respectively.

Italian 10-year bond yields were last trading up 1 basis point at 0.70%.

In money markets, three and six-month Euribor interbank borrowing rates hit new record lows of -0.523% and -0.521% respectively on Friday on the expectation that the ECB’s lending target will be easier to hit, said Lyn Graham-Taylor, fixed income strategist at Rabobank.

“There’s expectation that the ECB will extend the situation where you’re able to effectively borrow money at an interest rate of -1%... because borrowing using targeted liquidity operations (TLTROs) that’s the lowest possible rate you can pay as a bank,” Graham-Taylor said.

Most analysts believe that the ECB’s choice of stimulus in December will be to extend its pandemic emergency bond-buying programme, with some saying that the targeted liquidity operations (TLTROs) may also be on the agenda. Few expect a rate cut.

Money markets project a roughly 25% probability the ECB will lower the benchmark interest rate to -0.60% from the current -0.50%.

“Even with the Covid-19 situation worsening, this leaves room for spreads to tighten and rates to grind lower,” ING analysts said, referring to the risk premium countries like Italy pay for their debt on top of German borrowing costs.

Benchmark German 10-year Bund yields were last up 1 bp at -0.62%.

German retail sales fell more than expected in September, data showed on Friday, first-estimate euro zone inflation remained stable in October and third quarter GDP growth beat analyst expectations.

But the data failed to have an impact on rates as it didn’t reflect the latest Covid19 restrictions across the European continent, Rabobank’s Graham-Taylor said. (Reporting by Olga Cotaga, additional reporting by Yoruk Bahceli; Editing by Kirsten Donovan and Susan Fenton)