LONDON, Aug 27 (Reuters) - Italy's government bond and stock markets rallied on Tuesday after a Democratic Party (PD)official said progress has been made on forming a government with the anti-establishment 5-Star party.
Italy's 10-year bond yield fell to a 1.143% -- its lowest in three years -- and was last down 18 bps on the day.
The gap over benchmark German Bund yields narrowed to around 181 bps -- its tightest in a month.
Italy's blue-chip stock index hit its highest in more than three weeks on the comments, rising 1.8% and far outperforming its regional peers. At 1345 GMT, the Milan index was up 1.5%. (Reporting by Dhara Ranasinghe and Josephine Mason; Editing by Tommy Wilkes)