* Southern European debt in demand in "buy the dip" trade
* Italian yields 3 bps lower, still 11 bps higher for the week
* Italy's League says leaving the euro not a priority
* Draghi to speak on Friday afternoon
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr
By Abhinav Ramnarayan
LONDON, May 11 (Reuters) - Investors bought up Southern European government bonds on Friday, taking advantage of a rise in yields on the back of Italian political concerns, though Italian 10-year yields were still set for their biggest weekly rise since February.
Italian, Spanish and Portuguese 10-year borrowing costs dropped 2-3 basis points, outpacing better-rated peers at the end of a week in which the increasing likelihood of an anti-system coalition taking power in Italy had hurt "peripheral" debt.,,
Such reversals are not unusual in the market, particularly given that Italian 10-year yields had reached a seven-week high of 1.945 percent on Thursday. On Friday, it was down 4.5 bps from Thursday's peak and down 3 bps from the close.
With European Central Bank bond purchases underpinning the market, many investors feel confident enough to take advantage of the extra yield on offer.
In addition, one of Italy's problem banks, Monte dei Paschi di Siena, swung to a first-quarter net profit of 188 million euros ($224 million) helped by falling writedowns and cost cutting.
In addition, one analyst said that investor confidence in the future of the euro zone helps contain any sell-off in euro zone debt.
"The League is reported as saying that (leaving the) euro was not one of the priorities, this gives investors confidence to buy the dip," said DZ Bank analyst Pascal Segesser. "Also in general there's a feeling that because of Macron and Merkel, there will be some stability in the region."
Italy's exit from Europe's single currency is not among the priorities of the far-right League party, which is in talks to form a government with the anti-establishment 5-Star Movement, a top League senator said on Thursday.
Central bankers around the world also appear to have become even more cautious as concerns over inflation and international trade cloud the global economic picture.
On Thursday alone, the Bank of England held rates against recent expectations and New Zealand's Reserve Bank said the official cash rate will remain at 1.75 percent for "some time to come".
This leaves the U.S. Federal Reserve as the only major central bank committed to rate hikes, but lower-than-expected inflation in the world's largest economy has put some doubt over the pace of these hikes.
The U.S. Consumer Price Index, the government's broadest inflation gauge, increased 0.2 percent in April, less than the 0.3 percent rise projected by economists polled by Reuters.
Later on Friday, European Central Bank President Mario Draghi is due to give the State of the Union address in Florence, and the market will be watching for any comments on bond purcheses.
"Anything he says on when the asset purchase programme may end might affect Italy, BTPs might react," said Segesser of DZ Bank.
Outside of Southern Europe, most euro zone government bond yields were more or less unchanged. The yield on 10-year German government bonds, the benchmark for the bloc, was unchanged at 0.545 percent. (Reporting by Abhinav Ramnarayan Editing by Richard Balmforth)