* Italy bond yields up +10 bps, biggest one-day jump in a month

* Weak PMI comes as Italy slips into recession

* German Bund yields pinned around 15 bps (Updates prices)

LONDON, Feb 1 (Reuters) - Italian government bond yields jumped on Friday after a dismal factories activity survey fuelled concern about a rising budget deficit and the outlook for an economy that has slipped into recession.

Italian manufacturing activity contracted for the fourth month running in January and at its sharpest rate since 2013, the Purchasing Managers’ Index (PMI) survey showed, pointing to ongoing economic weakness.

The euro zone’s third-largest economy fell into recession at the end of last year, data showed on Thursday, and Friday’s PMI suggested things could even get worse.

Italy’s 10-year bond yield jumped as much as 19 basis points to 2.78 percent at one stage, before settling at 2.73 percent, still up 14 bps on the day.

Two-year yields rose by a similar amount to 0.43 percent and were poised for their worst day in nearly two months.

While weaker data in general has bolstered euro zone bond markets as investors bet the European Central Bank will keep record-low rates in place for some time, Italy is an outlier.

For investors, poor Italian data is another sign that the economic growth assumptions behind the Italian government’s budget deficit forecasts last year were too optimistic.

Indeed, the scale of selling in Italy’s bonds on Friday was reminiscent of the episodes last year when concerns about the Italian government’s spending plans rattled investors.

“There is a lot of chat about the technical recession and what that means for budget deficit slippage,” said Rabobank rates strategist Lyn Graham-Taylor. “The PMI data adds to the economic gloom and has raised concern that the budget deficit will be worse than thought and that has spooked the market.”

The Italian/German 10-year bond yield gap widened to almost 257 bps, up 13 bps from late Thursday levels.

That unease spilled over to Italian stocks. Italian banking stocks slid almost 3 percent as the bond selloff hurt lenders, who are large holders of sovereign bonds.

“While of course the GDP figure concerns Q4 last year, today’s PMI shows that the negative momentum is just continuing into 2019,” said Natixis rates strategist Cyril Regnat.

“Some investors are now maybe revising their expectations for Italian GDP growth prospects for 2019.”

FLATTER GERMAN CURVE

Outside Italy, euro zone bond yields were little changed and close to recent lows.

Germany’s 10-year Bund yield was stuck around 0.17 percent and within striking distance of its lowest levels in over two years.

The near 5 bps fall in Bund yields this week on deepening growth worries has flattened the yield curve, with the gap between two and 10-year German yields briefly touching 69.70 bps -- the tightest level since October 2016.

Data on Friday showed inflation in the euro area slowed to 1.4 percent in January from 1.6 percent a month earlier, while core inflation or prices excluding food and energy picked up to 1.2 percent.

There were also some positive signs from the U.S. economy, with data showing non-farm payrolls jumped by 304,000 jobs last month, the largest gain since February 2018.