By Virginia Furness and Abhinav Ramnarayan
LONDON, Aug 2 (Reuters) - Italy's borrowing costs rose to their highest in almost two months on Thursday, as media reports of a government meeting on the budget revived market concerns about tensions within the ruling coalition.
Analysts cited Italian papers as saying ministers would meet on Thursday to discuss the budget for 2019 as one possible trigger for the move, while a sharp sell-off in Poste Italiane shares also weighed on sentiment.
There are worries that Economy Minister Giovanni Tria faces pressure from within the government to ramp up spending and challenge EU budget rules.
An Italian government source told Reuters the meeting was expected to be postponed because some participants could not attend.
Italy's 10-year bond yield jumped as much as 16 basis points to around 2.96 percent, its biggest daily rise in over a month, before retreating to 2.91 percent.
"Today's move shows once again the present fragility of the Italian market," said a government bond fund manager based in Milan who asked not to be named.
"Everything can be a trigger – like today's (ministerial) meeting ...or headlines on a trade war between the U.S. and China... Hedge funds make a try almost every day to go short on Italy and see if others follow."
Italian bond yields rose 12 to 18 bps across the curve with two-year yields crossing the 1 percent mark for the first time since late June to reach 1.02 percent at one stage.
The closely watched spread between Italian and German 10-year yields widened to 250 bps, for the first time in more than a month, before tightening to 244 bps before the close. .
"There's been headlines about Poste Italiane and there's a feeling that (League leader Matteo) Salvini and (5-Star leader Luigi) Di Maio wanted Tria's head," said Mizuho strategist Antoine Bouvet.
"Tria is seen as a pro-EU finance minister, so if they get rid of him, it's not going to be viewed favourably in the market at all."
Poste Italiane tried to reassure investors on Thursday after the stock fell nearly six percent on a sharp drop in the solvency ratio of the Italian post office due to a sell-off in the country's government bonds.
Other analysts also cited greater certainty of another U.S. rate hike, as well as thin summer trading volumes as contributing to the move in Italian yields.
Italy's benchmark stock index was down 2.1 percent at the close, lagging broader European stock markets while Italian banks were down 3.7 percent
Broader euro zone bond yields were mostly lower as concerns about global trade tensions boosted demand for safe-haven debt.
Bund yields in Germany, the euro zone's benchmark, extended their falls as Italian bonds came under pressure.
Reporting by Abhinav Ramnarayan and Virginia Furness; Additional reporting by Giuseppe Fonte and Danilo Masoni in Italy; Editing by Dhara Ranasinghe and John Stonestreet