* Spanish bond yields jump on bank funding plans
* European shares give up gains from Greek poll results
* Market holidays in Europe, U.S. to keep volumes light
By Richard Hubbard
LONDON, May 28 (Reuters) - European shares turned lower and the euro slipped back toward two-year lows on Monday as a plan by Spain to use public debt to revive one of its troubled banks pushed up the premium investors demanded to hold the Madrid government’s bonds.
The rise in Spanish government debt yields, which saw 10-year bonds touch a high of 6.5 percent, undermined gains in other riskier assets linked to weekend polls giving a pro-bailout Greek party a slender lead ahead of a June 17 election.
Global share markets, commodities and the euro had been recovering from the sharp falls of last week. The declines had come when investors fled to the safety of the U.S. dollar on mounting concerns about Greece’s future and Spain’s banking sector, and after some disappointing economic data from China and Europe.
In markets thinned by public holidays across Europe and in the United States, the easing in speculation on a euro zone break-up helped lift the MSCI world equity index 0.2 percent to 300.85, though this was only 1.4 percent above its lows for the year, set last week.
The FTSEurofirst 300 index of top European shares was little changed by mid-afternoon on Monday at 984.64 points, having reversed course from a session high of 993.21. It remains on course for its biggest monthly loss since an August selloff last year.
Spain’s IBEX was the main faller, down 2 percent, led by banking sector heavyweights Santander and BBVA .
The outlook across the risk asset markets worsened as it emerged that Spain may recapitalise the troubled lender Bankia with sovereign paper in return for shares in the bank.
Government sources told Reuters this method could also be used to prop up other troubled lenders - moves which would push the country’s debts above the 79.8 percent of economic output that had been expected this year.
“I don’t believe transferring the bad assets of the bank onto the sovereign is in any way a good idea,” said Brenda Kelly, senior strategist at CMC Markets.
Bankia shares fell 26.8 percent as trading resumed following a suspension on Friday. In the interim, the bank had asked the state for rescue funding of 19 billion euros ($24 billion).
“When you think about $24 billion for one bank you could be looking for anything upwards of 60 billion to a 100 billion if it all falls apart,” she said of the Spanish banking sector.
Those concerns sent the premium investors require to hold Spanish government bonds over their safer German counterparts up 16 basis points on Monday to 514 bps, the highest since the euro was launched over a decade ago.
Spanish 10-year government bond yields also jumped 15 bps to 6.49 percent, their highest since November, while equivalent Italian government bond yields followed suit, gaining 7 bps to 5.87 percent.
Spain’s Prime Minister Mariano Rajoy said only that the government is currently studying how best to inject public funds into its troubled banks, adding that there had not been any talks with the European Central Bank over recapitalising Bankia .
The euro edged down 0.3 percent to $1.2525, drifting nearer to Friday’s low of $1.2495, its lowest since July 2010. After last week’s sharp falls, the single currency is on track for its worst month since September.
The outlook for the single currency is limited by the high numbers of leveraged investors in the foreign exchange market holding euro bearish bets, as revealed by data for the week to May 22 released by the U.S. Commodity Futures Trading Commission (CFTC).
“Because the market is very, very short euro, reactions to any positive news may be bigger than those to negative news,” said Mitul Kotecha of Credit Agricole Corporate and Investment Bank.
Commodity markets, already firmer on the prospects pro-bailout parties may succeed in the Greek election and the resultant easier tone in the U.S. dollar, also gained a boost from hopes China may take steps to boost its flagging economy.
A government official told Reuters on Monday that China will soon resume paying subsidies to rural residents who trade in old vehicles for new ones in an effort to rekindle demand in the world’s largest auto market.
Three-month copper on the London Metal Exchange rose 0.5 percent to $7,683.75 a tonne, recovering from falls of 8 percent this month.
Brent crude oil gained for a third session to be $107.60 per barrel. The price was also affected by Middle East oil supply concerns as talks over Iran’s nuclear programme faltered. U.S. crude oil futures also rose more than $1 to a high of $91.92.
Spot gold gained 0.3 percent at $1,577.76 an ounce, its highest level in nearly a week.
Investors were also looking ahead to major economic data due from the United States this week which includes consumer confidence, gross domestic product and, on Friday, the May non-farm payrolls report, which could provide clues on whether the economy is running out of steam or has simply hit a soft patch.
“Data this week will reveal further contrasts between the U.S. and euro zone,” said Credit Agricole’s Kotecha.