* Dollar/yen hits near 4-mth high with US yields at 7-yr peak
* Beijing offers Trump package in trade talks
* Crude dips back from 2014 high, still up 3 pct for the week
* Italy political uncertainty weighs on bonds and euro
* Gold set for worst week of the year
By Marc Jones
LONDON, May 18 (Reuters) - World markets began to strain on Friday after a rollercoaster week that has seen oil break $80 a barrel, Italian politics rattle the euro zone again and emerging markets battered by a pumped-up dollar and rising borrowing costs.
Traders hit Italian bonds, stocks and the euro as a pledge to ramp up spending from a coalition government taking shape in Rome caused fresh unease, while Wall Street was waiting to see the outcome of U.S. and China trade talks..
Italy's strife sent long-term borrowing to more than seven-month highs, stocks in Milan fell one percent taking European stocks down with them, while the euro dropped back towards this week's 5-month low.
Rome's bonds have seen their biggest sell-off in over a year this week. Italy accounts for around 15 percent of euro zone GDP and a qaurter of the bloc’s public debt. For comparison, crisis poster child Greece contributed just 1.8 percent to euro zone GDP and 3.3 percent to its pile of public debt.
"We have read the (Five Star-League government) contract and the big question mark is where are they going to get the money," Angelo Media, head of equities at Banor SIM said.
One policy includes issuing more short-term debt to pay companies owed money by the state, the economics chief of the one of the coalition parties, the far-right League, said on Friday.
With the dollar's surge back on though, and oil shares gleeful about its rapid rise, European shares were heading for an eighth straight week of gains despite the Italian turbulence.
Slowing Japanese core consumer price growth that kept the Bank of Japan's elusive 2 percent target well out of reach also kept the yen on the slide. It hit a four-month low of 111 per dollar.
It helped the six-currency dollar index rise to a new five-month high of 93.63.
The index has gained about 1 percent this week, buoyed by the surge in U.S. Treasury yields, with the 10-year U.S. Treasury note yield scoring a seven-year peak of 3.128 percent.
Euro traders meanwhile have nudged the shared currency back below $1.18. It has fallen nearly 1.2 percent this week, largely pressured by the Italian uncertainty.
It is also heading for its fifth successive weekly drop versus the dollar, which would be a first for the shared currency since 2015.
"We don't have an agreement on a (Italian) government at this point, but the market remains worried," Societe Generale strategist Alvin Tan said, also pointing to this week's fall in the euro against the traditionally-safe Swiss franc.
Elsewhere the two other macro spotlights were the hot oil markets after Brent crude broke up through $80 a barrel on Thursday, and the strain on emerging economy currencies.
The Turkish lira was wobbling again having fallen to a record low this week, the Brazilian real plumbed a two-year low, while Mexico's peso has shed more than 5 percent this month.
That latter continues to be hit by negotiations to rework the North American Free Trade Agreement (NAFTA), which governs Mexico's trade with the United States.
"The NAFTA countries are nowhere near close to a deal," U.S. Trade Representative Robert Lighthizer said in a statement, pointing to "gaping differences" on a host of issues, including intellectual property, agricultural access, labor and energy.
A retreat by Indonesia's rupiah to a 2-1/2-year low prompted the central bank to tighten monetary policy on Thursday for the first time since 2014 to support the currency. It slipped again on Friday too.
Overall for the big emerging market currencies it has been the worst week in 18 months.
"Perhaps the most unnerving aspect of the recent rupiah weakness has been the sheer speed in which the currency markets have turned against some emerging market countries," wrote Sean Darby, chief global equity strategist at Jefferies.
"However, policy credibility is the most important tool and the fact that the Indonesian central bank has begun to tighten ought to alleviate some of the FX pressures."
In commodities, Brent crude oil futures were 47 cents higher at $79.76 a barrel after rising to $80.50 on Thursday, their highest since November 2014.
Brent has risen 3 percent this week and is headed for a sixth week of gains.
A rapid slide in oil supply from Venezuela, concern that U.S. sanctions will disrupt exports from Iran, and falling global inventories have all combined to push oil prices up nearly 20 percent in 2018.
Gold meanwhile has had its worst week since early December, having dropped more than 2 percent.
Additional reporting by Shinichi Saoshiro in Tokyo