Euro zone government bond yields carry on rising; focus on Fed

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

LONDON, Feb 23 (Reuters) - Core European government bond yields picked up in early trading on Tuesday, resuming their upward trajectory, even after the European Central Bank signalled discomfort with the recent surge in yields.

Borrowing costs across the euro zone have risen sharply this month as the prospect of more U.S. fiscal stimulus boosted hopes for a faster economic recovery globally.

ECB President Christine Lagarde said on Monday that the central bank was "closely monitoring" rising borrowing costs - a comment which knocked Germany's 10-year Bund yield off its eight-month high. The French and Italian benchmark yields also dropped.

"The swift bullish flattening on these comments underline the ECB's commitment to controlling the yield curve even during challenging times, where words are more effective than volumes in the current environment," wrote Commerzbank rates strategist Christoph Rieger in a note to clients.

But the fall looked short-lived on Tuesday, as yields were up by around 2-3 basis points for core bonds and around one basis point in the periphery.

At 0757 GMT, the Germany 10-year yield was at -0.326%, up 2 bps.

The French 10-year yield was up by a similar amount, at -0.0787%.

Italy's 10-year yield was higher, at 0.604% at 0800 GMT .

Market attention is expected to focus on the United States, where Federal Reserve Chair Jerome Powell is due to give congressional testimony later in the session. Investors will be watching for any change in the central bank's dovish outlook.

"Like Lagarde, Powell looks set to counter the real yield repricing. We suggest buying renewed setbacks in Bunds," Commerzbank's Rieger said.

The gap between yields on two- and 10-year Treasury notes , which is seen as an indicator of economic expectations, hit its highest since 2017 on Monday, at 128.37 bps, but had dipped to 125.36 bps by 0814 GMT on Tuesday.

"While we think price pressures may spike in the near term as pent-up demand meets constrained supply, we believe fears about a persistent rise in inflation are likely to prove overdone. With this environment in mind, we think investors should be prepared for inflation concerns to persist, which could trigger bouts of volatility," UBS said in a note. (Reporting by Elizabeth Howcroft, editing by Larry King)