UPDATE 1-Italy's bond yields test three-week highs against economic worries

* Italian bonds underperform, yields reach their highest level in three weeks

* Other bond yields in the euro area are largely stable

* Performance of eurozone periphery bonds tmsnrt.rs/2ii2Bqr (Update of price action on Italian bonds, adds commentary)

By Dhara Ranasinghe

LONDON, Feb. 4 (Reuters) – Italian government borrowing costs briefly hit their highest level in three weeks on Monday, spurred by growing concern that the worsening economic outlook is worsening the country's fiscal situation.

As yields fell as the session progressed, badysts said it was more due to a lack of new drivers than a change in the bearish tone that gripped the markets late last week.

Last week's data confirms that the Italian economy went into recession in the fourth quarter of 2018, while the manufacturing sector contracted for the fourth consecutive month in January, suggesting that the situation could deteriorate further. .

Weak data has generally strengthened bond markets in the euro zone, with investors betting that the European Central Bank will keep its record low rates longer.

However, in Italy, poor data only exacerbated concerns about a further deterioration of public finances and fueled speculation about new fiscal measures. Italy is one of the most indebted countries in the euro zone.

"Economic data has revived the skepticism we saw last year about the wisdom of the new government's budget plans," said Chris Scicluna, head of economic research at Daiwa Capital Markets in London.

"There is a good chance we will see another quarter of negative growth in the first quarter."

Daiwa expects Italian economy growth of only 0.1% in 2019. Last month, the Bank of Italy lowered its economic growth forecast for 2019 from 1% to 0.6%.

Italy's 10-year yield rose nearly eight basis points to 2.806%, before falling back to around 2.72%, a drop of just one bp in the day.

After a strong sale, the curve's bonds returned to more stable territory, with yields at two and five years also slightly lower.

Analysts said the Italian bond market was not over yet.

"Italy bears a huge debt burden and the government was hoping for better growth," said Michael Hewson, Chief Markets Analyst at CMC Markets. "At some point this year, Italy will become a problem once again."

Outside Italy, yields on most 10-year bonds in the bloc rose slightly that day. The yield on the 10-year German Bund at 0.17% was close to the lows of the month.