* Spanish and Italian bonds rebound after sell-off * Greek yields surge as political turmoil deepens * Bunds stabilise, analysts divided on direction * Analysts flag risks of continued high volatility By Ana Nicolaci da Costa LONDON, June 21 (Reuters) - Spanish and Italian government bonds rebounded on Friday after a sharp sell-off triggered by the prospect of reduced U.S. monetary stimulus, and German Bunds stabilised. Greek government bonds underperformed, with borrowing costs on debt issued by the bailed-out country surging to their highest since April after political turmoil dragged the sovereign back into the spotlight. Fed Chairman Ben Bernanke said on Wednesday the U.S. economy was expanding strongly enough for the central bank to begin slowing the pace of its bond-buying later this year, triggering a broad sell-off across financial markets. After this week's sharp moves, analysts expected euro zone bonds to stabilise somewhat into the weekend but said trade was expected to remain choppy over the near-term. "There have been huge moves, there have been huge repositionings, so maybe before the weekend, volatility can come down a bit," said Piet Lammens, strategist at KBC. Ten-year Spanish government bond yields fell 6.6 basis points to 4.82 percent, after rising more than 30 basis points in the previous session. Italian yields fell 4 basis points to 4.53 percent. German Bund futures fell 7 ticks to 142.06, having posted their biggest daily fall since March in the previous session. Ten-year yields were little changed at 1.67 percent, with analysts flagging resistance around 1.70-1.73 percent. Investors were divided on the outlook for German yields over the medium-term. While some saw them rising further along with U.S. Treasuries, others said the upside was limited by the euro zone's continuing economic woes. Also, if market volatility increases to a level where it harms the global economic recovery and leads to another flare-up in the euro zone debt crisis, investors may bet on further ECB action and seek shelter in safe-haven Bunds, driving German yields lower. Analysts said illiquid bond markets such as Portugal and Greece were particularly vulnerable to further selling. Ten-year Portuguese yields were flat at 6.44 percent on Friday, while equivalent Greek borrowing costs surged 79 basis points to 11.50 percent. Greece's Democratic Left party may pull out of the ruling coalition on Friday after talks to resume state television broadcasts collapsed, plunging the nation into fresh turmoil.

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