(Updates paragraphs 1-2 with latest rise, adds analyst quote in

paragraph 5, graphic, details and analyst on Italy, Germany,

France in paragraphs 8-16)

By Harry Robertson

LONDON, Feb 19 (Reuters) - Euro zone bond yields rose to

their highest in more than two weeks on Wednesday as investors

focused on potential extra borrowing to fund higher defence

spending amid U.S.-Russia talks over the war in Ukraine.

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

the euro zone bloc, rose 4 basis points (bps) to 2.529%, the

highest since Jan. 31. Yields rise as prices fall and vice

versa.

Benchmark German yields have risen around 9 bps this week

after U.S. President Donald Trump shocked allies by initiating

talks with Russia over ending the Ukraine war, and figures in

his administration said Europe will have to shoulder more of the

security burden.

That implies higher spending on defence and so higher

borrowing via bond markets, adding to upward pressure on yields.

"All of a sudden not only politicians but also markets seem

to be waking up to the reality that there will be substantially

more defence spending, and that will have to be financed

somehow," said Jussi Hiljanen, head of European rates strategy

at SEB.

Investors were also digesting the latest tariff threats from

Trump, who said he intends to put a roughly 25% levy on cars.

Elsewhere, UK inflation came in stronger than expected, rising

to 3% in January from 2.5% in December.

SPREADS TIGHTEN

​Italy's 10-year yield was up 5 bps at 3.594%,

also its highest since late January.

The gap between Italian and German 10-year yields

- a gauge of the extra premium investors demand to

hold Italian debt - stood at 105 bps, not far from the more than

three-year low of 101 bps touched on Friday.

The spread between French and German 10-year bond yields

ended at its lowest closing level since July at 66 bps on

Tuesday and hovered around there on Wednesday.

The risk premium on French debt shot higher last summer when

President Emmanuel Macron called elections that resulted in a

hung parliament and political stasis.

Yet the eventual passing of a budget earlier this month has

cooled concerns among investors about the economy.

Benjamin Schroeder, senior rates strategist at ING, said the

prospect of closer European cooperation over borrowing might be

narrowing the gap between euro zone yields.

SEB's Hiljanen said positive sentiment among investors as

Trump appears to be holding off from dramatic tariffs was likely

the driver.

Germany's two-year bond yield, which is

influenced more by European Central Bank rate bets than

expectations about borrowing, was 2 bps higher at 2.149%.