(Corrects Italian five-year closing price)

* Biggest one day fall in short-end Italian bonds since June

* Analysts cite soothing budget comments from ministers

* Catalonian bond yields also fall on political news

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

LONDON, Sept 4 (Reuters) - Italian government bond yields fell sharply on Tuesday, pulling further away from three-month highs with investors encouraged by soothing comments from Italian ministers on forthcoming budget proposals.

On Monday sources told Reuters that Italian Economy Minister Giovanni Tria was pushing the parties in the governing coalition to keep next year’s budget deficit below 2 percent of output. Deputy Prime Minister Matteo Salvini said Italy’s 2019 deficit would not breach the limit set by the European Union.

“I would say the overall price action is quite encouraging and Salvini’s comments yesterday gave the market another push,” Commerzbank rates strategist Christoph Rieger said.

“The overall news and data situation is mixed at best but the fact that the market is able to stabilise underscores there are still some bargain hunters at these levels.”

Investors have shed Italian debt in droves in recent weeks on concerns that the new government in Rome would implement spending plans that put its debt pile under strain and breach EU fiscal rules.

But on Tuesday, Italian bond yields fell between eight and 22 basis points , having tumbled between five and nine basis points on Monday.

The two and five year yields fell by 22 bps at the winding down of trade, recording their biggest daily drop in almost three months. The two-year fell to 1.18 percent from 1.39 percent, with the five-year down to 2.29 percent from 2.51 percent.

The closely-watched Italy/Germany 10-year bond yield spread narrowed to 265 basis points, 18 bps tighter on the day and 26 bps tighter than last week’s close.

However, yields are still at elevated levels. Italy’s benchmark 10-year bond yield at 3.02 percent is around 55 bps higher and the spread over Germany 55 bps wider than its July trough.

NERVOUS

Rieger of Commerzbank said he was still nervous about earlier comments from Salvini and his fellow Deputy Prime Minister Luigi Di Maio indicating they will implement the will of the people rather than the will of the ratings agencies.

The comments were made after ratings agency Fitch on Friday changed Italy’s rating outlook to “negative” from “stable”. Moody’s and S&P Global are also due to review Italy’s rating by the end of October.

In addition, DZ Bank strategist Daniel Lenz said Italian bond yields have proven volatile in recent weeks.

“The intra-day pattern in Italian bonds we have noticed is that yields move downwards in the morning hours and perform weaker in the afternoons,” he said, as was the case on Monday.

Catalonian bond yields fell across the curve on Tuesday after reports that Spanish Prime Minister Pedro Sanchez has proposed a referendum on greater autonomy for Catalonia, though he was said to have ruled out an independence vote for the wealthy region.

Catalonian regional bonds maturing in February 2020 ES0000950E=, the largest bond the region has outstanding, hit an all-time low yield of 1.058 percent on Tuesday, though it had edged up to 1.26 percent by the end of trading.

Other euro zone bond yields were up to four bps lower in sympathy with Italy, though Germany’s 10-year government bond yield, the benchmark for the bloc, was around two bps higher at 0.36 percent.

Euro zone producer prices data increased by 4.0 percent in July year-on-year, against market expectations of a 3.9 percent gain, suggesting that inflation would be higher at the next release. (Reporting by Abhinav Ramnarayan; Editing by Gareth Jones)