* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr

LONDON, April 14 (Reuters) - Italy’s borrowing costs rose on Tuesday, reflecting some disappointment in bond markets over a half a trillion euro coronavirus rescue plan agreed by European Union finance ministers late last week.

The agreement includes almost unconditional use of the euro zone’s European Stability Mechanism (ESM) bailout fund for loans to governments, a scheme to subsidise wages so that firms can cut working hours rather than jobs, and a plan for the European Investment Bank to step up lending to companies.

Italian Prime Minister Giuseppe Conte on Friday criticised the deal, saying making available cheap loans from the euro zone bailout fund was a “totally inadequate tool” and Italy had no intention of applying for help from the ESM.

Italian government bond yields rose as much as 12 basis points in early trade .

Italy’s 10-year bond yield was last up 9 bps at 1.69%, while the gap over benchmark German Bund yields was at 200 bps - more than 10 bps wider than levels seen late Thursday before European markets closed for the long Easter weekend.

“Italian spreads reflect disappointment that Italy might not use the ESM facility,” said Antoine Bouvet, senior rates strategist at ING.

“There is a stigma attached to using the ESM facility - it doesn’t play well on the domestic scene. Also, we had these headlines with big numbers, but the ESM part is worth a small amount.”

In addition, the deal did not mention using joint debt to finance recovery - favoured by Italy, France and Spain but opposed by Germany, the Netherlands, Finland and Austria.

“With little sign of joint-issuance, Italy still looks fragile in the long-term,” analysts at Mizuho said in a note.

“Beyond the virus, Italy has various underlying issues that need to be addressed, and there is a real risk of further economic divergence between the nations,” they said, adding the peripheral government bonds were likely to underperform their higher-rated euro zone peers.

Highlighting that the debate over common bonds was unlikely to go away soon, European Commission Vice President Valdis Dombrovskis told German newspaper Handelsblatt the EU could finance a recovery fund worth up to 1.5 trillion euros ($1.64 trillion) with bonds guaranteed by member states.

Elsewhere, trade was generally subdued as trading resumed after the Easter holiday. Germany’s 10-year bond yield was steady at -0.34%.