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TREASURIES-U.S. 10-year yield near 7-year high as buying fades

* U.S. yields edge up after bond market selloff * Domestic factory output rises in April, housing starts fall (Updates market action, adds quote) By Richard Leong NEW YORK, May 16 (Reuters) - U.S. Treasury yields ended slightly higher on Wednesday, with the 10-year yield touching near a seven-year high, following a bond market selloff spurred by signs the U.S. economy is on a stronger footing in the second quarter.

Disappointing economic growth data in Japan as well as concerns about the financial demands of a potential Italian coalition government from its neighbors caused a drop in German bond yields, briefly stemming another jump in U.S. yields.

The 10-year yield's sharp rise on Tuesday to above 3.05 percent, which was seen as a key technical support level, unnerved Wall Street as traders considered whether U.S. bonds were gaining appeal as an alternative to riskier stocks.

The higher U.S. yields, however, failed to sustain buying interest in bonds amid lingering concerns about another surge in Treasury debt supply and tensions between the United States and its trading partners, analysts said.

"It's pure bearish momentum until it exhausts itself," said Karl Haeling, vice president at Landesbank Baden-Wurttemberg in New York. "Buyers don't want to come in until there is a better sign of stability." Data on Wednesday supported traders' view that the U.S. economy is expanding but far from firing on all cylinders. They did not change the notion that the Federal Reserve would stay on its gradual interest rate hike path.

U.S. industrial output grew 0.7 percent in April, while home construction declined 3.7 percent last month, government data showed.

The 10-year Treasury yield was up 1.5 basis points at 3.096 percent after touching 3.098 percent, which was the highest level since July 2011, in late Wednesday trading, Reuters data showed.

The two-year yield, which is sensitive to traders' views on Fed monetary policy, was marginally higher at 2.589 percent, which was the highest level since August 2008.

The modest yield rise on Wednesday did not shake the view of some investors that the bond market selloff is nearly done.

"Until that is a follow-through on wage growth, these yield levels are going to hold," said James Camp, managing director of fixed income at Eagle Asset Management in St. Petersburg, Florida.

The 10-year yield reversed an initial decline as Wall Street stock prices recovered some of Tuesday's losses. It also fell earlier in step with a fall in German Bund yields.

Italy's 10-year bond yield jumped nearly 19 basis points to 2.13 percent, its highest level since early March. Italian yields jumped in the wake of a draft program for a potential coalition government that revealed plans to demand 250 billion euros of debt forgiveness and create procedures to allow countries to exit the euro. May 16 Wednesday 3:42PM EDT/ 1942 GMT Price US T BONDS JUN8 140-29/32 -0-5/32 10YR TNotes JUN8 118-128/256 -0-28/256 Price Current Net Yield % Change (bps) Three-month bills 1.87 1.905 -0.010 Six-month bills 2.035 2.0847 0.000 Two-year note 99-152/256 2.5892 0.004 Three-year note 99-154/256 2.7645 0.008 Five-year note 99-36/256 2.9375 0.013 Seven-year note 98-216/256 3.0607 0.014 10-year note 98-28/256 3.0964 0.016 30-year bond 98-52/256 3.2188 0.010 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 22.25 0.75 spread U.S. 3-year dollar swap 16.75 1.00 spread U.S. 5-year dollar swap 9.25 1.25 spread U.S. 10-year dollar swap 2.75 0.00 spread U.S. 30-year dollar swap -8.00 0.00 spread (Reporting by Richard Leong Editing by Paul Simao)