Spanish, Italian yields bounce off five-month lows on weak PMIs

* Periphery yields edge up on weak euro zone PMIs

* Bund futures hit two-month highs after U.S. PMIs

* Some in the market speculate about further ECB easing

By Marius Zaharia and Emelia Sithole-Matarise

LONDON, Oct 24 (Reuters) - Spanish and Italian bond yields bounced off five-month lows on Thursday after surveys showed growth in euro zone business activity unexpectedly eased, suggesting the economic recovery may be losing momentum.

German Bunds futures weathered the euro zone data but were briefly pushed to their highest in over two months by weaker than expected U.S. manufacturing growth figures, which supported expectations the Federal Reserve would delay trimming its bond-buying stimulus at least until early next year.

The pace of growth in the euro zone's dominant service sector eased sharply, with the purchasing managers' index (PMI) falling to 50.9 in October from 52.2 in September. It had been expected to nudge up to 52.4 and was below all forecasts in a Reuters poll of 33 economists.

An index measuring new business slumped to 50.2 from September's 27-month high of 51.7.

Anything above the 50 mark indicates growth.

These numbers contrasted with flash Markit/HSBC PMI numbers for China, the world's second-biggest economy, which rose to a seven-month high in September.

Italian 10-year yields were last up 3 basis points at 4.15 percent, having hit their lowest since early June at 4.085 percent on Wednesday, according to Reuters data. They rose as high as 4.18 immediately after the euro zone PMIs.

Equivalent Spanish yields were 1 bp higher at 4.15 percent, having hit their lowest since May at 4.107 percent minutes after the market opened.

Traders said some investors used the PMI data as an opportunity to book profits on the recent rally in lower-rated debt but returned to those markets later in the session given that most other recent euro zone data have been positive.

"Today's PMIs do raise a question mark over the recovery, but only a small one. It's too early to get too concerned," Investec chief economist Philip Shaw said.


ECB WATCH

Speculation of further monetary easing by the European Central Bank, which was fostered by the weak PMIs, also supported peripheral debt.

At 1.1 percent in September, inflation has fallen way below the ECB's close-to-2-percent target and with the euro hitting its highest in two years versus the dollar on Thursday, threatening to choke export growth, that could give the ECB extra reasons to ease policy.

But some analysts still have doubts the ECB is going to cut rates further or inject more liquidity, and say the stronger euro may have a negative impact on those bonds.

"The ECB has said repeatedly that they never use the currency as a medium-term objective," said Gianluca Ziglio, executive fixed income director at Sunrise Brokers. "The strong euro could be problematic for countries like Italy."

Returning to sustainable growth is key for reducing overall indebtedness in peripheral countries.

Bund futures briefly hit their highest since mid-August at 141.22 after surveys showed U.S. manufacturing grew at its slowest pace in a year this month and factory output contracted for the first time since late 2009.

They closed only 1 tick higher at 140.87, however.

"The numbers were weak, but not a game changer or picture changer by any means. Delayed (Fed bond-buying) tapering is so much in the market now," said David Keeble, global head of fixed income strategy at Credit Agricole.

"These are good selling levels."