(Updates at 1459 GMT)

By Stefano Rebaudo

June 10 (Reuters) - French and Italian borrowing costs

touched multi-month highs on Monday and the premium investors

demand to hold the countries' bonds rose after eurosceptics

gained in a European vote and France called a snap parliamentary

election.

French President Emmanuel Macron made the surprise call

after his camp lost heavily to the far-right National Rally in

European Parliament elections over the weekend.

The political shift may complicate European Union attempts

to deepen integration, increasing the risk premium investors

seek to hold bonds of the most indebted countries.

Italian and French sovereign credit default swaps also rose

to multi-week highs.

However, market participants expect the current increase in

volatility to be short-lived as centre, liberal and socialist

parties are set to retain a majority in the European parliament.

"The EU elections produced the expected shift to the right,

but the most important development may be the severe weakening

of the French and German leaders," said Citi in a research note.

"The silver lining could be an opening for Mario Draghi as

European Council President and agenda setter," it added,

referring to a former president of the European Central Bank.

The vote dealt a domestic blow to the leaders of both France

and Germany, raising questions about how the EU's major powers

can drive policy in the bloc.

It also increases uncertainty over whether European

Commission President Ursula von der Leyen will be re-elected.

The European Parliament will hold a plenary vote on her

candidacy, most likely on 18 July, according to global advisory

firm Teneo.

"The EU was facing a historically challenging time with both

internal and external 'cracking' in systemic issues that require

increased - not decreased - cooperation," said Dana Malas

strategist at SEB group.

The yield gap between French and German bond yields

widened by 8.5 basis points (bps) to 56 bps.

France's 10-year yield was last 13.5 bps higher

at 3.244%, its biggest one-day jump in 11 months and its highest

since mid-November.

"The results of the European elections have left a visible

mark on the market," said Sophia Oertmann, analyst at DZ Bank.

"The extent of the market impact following the election...is

likely to be attributable to the national rather than the

European implications of the European elections," Oertmann

added, highlighting the widening of euro area yield spreads.

The spread between Italian and German 10-year yields

widened 9.5 bps to 141 bps as Italy's 10-year

yield hit its highest since December at 4.085%

The gap between Greek and German yields

widened 6 bps to 102, with equivalent Spanish and

Portuguese spreads widening by about 4 bps.

"As long as the centrist majority acts as a unified bloc,

and the right-wing groups remain a non-coherent bloc, the impact

on the course of policy will remain limited," said Marion

Muehlberger, senior economist at Deutsche Bank.

"Fears of a populist shock seem to have been premature, but

they may serve as a barometer of where national politics is

headed," she added.

German yields rose as investors waited for U.S. inflation

figures ahead of a Federal Reserve policy meeting this week and

after jobs data on Friday suggested the U.S. central bank would

be in no rush to cut rates.

Germany's 10-year bond yield, the benchmark for

the euro area, rose 6 bps to 2.68% but remained below late May's

high of 2.707%.

Markets expect no change in Fed rates, but see a risk that

policymakers' "dot plot" analysis of potential future policy

changes might only point to one rate cut for this year.

They are currently pricing in 38 bps of easing in 2024

which implies one rate cut and around a 50% chance of

a second move by December.