* Italian borrowing costs rise as Monti says quitting early * Move casts uncertainty over country's political future * Market positioning increases the risk of sell-off * Spanish yields also rise, Bunds benefit By Ana Nicolaci da Costa LONDON, Dec 10 (Reuters) - Italian government bond yields jumped on Monday as Prime Minister Mario Monti's decision to resign early left the country's political future unclear, hurting riskier euro zone debt. Monti said on Saturday he would resign once the budget for 2013 was approved, raising questions over who will take the reins of the euro zone's third largest economy at a time when it remains a focus of the region's three-year debt crisis. The announcement, which will potentially bring forward an election due early next year, came after former prime minister Silvio Berlusconi's party withdrew its support for the government and he said he would run to become premier for a fifth time. "Berlusconi's actions have created a degree of uncertainty in the market with regards to the Italian political scene," Justin Knight, European rates strategist at UBS said. "Part of the problem here is that investors outside of Italy are not positioned very well for this," he said. "They're quite close to neutral versus benchmarks, having previously been underweight of both Spain and Italy. Some investors are now overweight, and we have seen more investors going overweight over the last few weeks." Top-ranking German bonds benefited from the uncertainty. Bund futures were 28 ticks higher at 146, pushing 10-year yields 2.3 bps lower to 1.27 percent. Ten-year Italian borrowing costs, meanwhile, jumped 25 basis points to 4.80 percent, while the Spanish equivalent was 14 bps higher at 5.62 percent. Spanish Economy Minister Luis de Guindos said on Monday his country would suffer contagion from Italy's political turmoil and Madrid continued to study the need for outside assistance. Five-year credit default swaps (CDS) on Italian government debt rose 33 bps to 288 bps, according to data monitor Markit. This means it costs $288,000 annually to buy $10 million of protection against an Italian default using a five-year CDS contract. "Any question over their dedication to austerity is not going to be good for BTPs (Italian debt) especially given the fact that everyone is long," said one trader in reference to the recent bout of buying based on the prospect of European Central Bank support. HIGHER BORROWING COSTS Alessandro Giansanti, senior rate strategist at ING, said Monti's move could see 10-year Italian borrowing costs rise to 5.25 percent over the next two weeks as it will complicate the parliament's passage of measures aimed at keeping the country's debt in check. The ECB's promise to buy bonds of countries that ask for help first has seen Italian borrowing costs fall some 200 basis points since July's high of 6.7 percent - a level viewed as unsustainable for long-term funding. "The main risk is that the measures that the current government will need to pass come at risk," Giansanti said. The sell-off could be accentuated by the extent of the recent bond rally and as liquidity thins into the end of the year, he added. As riskier debt came under selling pressure, bonds issued by other higher-rated countries also benefited. Yields on 10-year French debt shed 2.2 bps to 1.94 percent and the Dutch equivalent fell 2.5 bps to 1.50 percent. Even during the recent peripheral rally, safe haven bonds have enjoyed underlying support from investors worried about an impasse in ongoing U.S. budget talks. The White House and Republicans are trying to reach an agreement that would stop automatic spending cuts and tax increases from going into effect at the beginning of the year - a "fiscal cliff" that many worry could tip the U.S. economy back into recession, if it kicks in.