(Adds latest prices, further news, quotes and analyst reaction)

By Yadarisa Shabong and Lucy Raitano

March 18 (Reuters) - Germany's government bond yields

held steady near multi-month highs Tuesday as the country's

parliament voted to approve a historic spending splurge, which

will lead to a dramatic increase in bond issuance.

Berlin signed off on plans for a massive increase in

spending that throws off decades of fiscal conservatism in hopes

of reviving economic growth and scaling up military spending for

a new era of European collective defence.

European yields have jumped sharply since the proposals were

announced, with the German 10 year yield reaching as high 2.938%

last week, its highest since October 2023.

It was last 2.815%, up one basis point on the day, walking

most of a small early gain.

That "tells you that the vote was priced in, ditto for the

German ZEW, not usually a market mover," said Kenneth Broux,

head of corporate research FX and rates at Societe Generale.

German investor morale improved more than expected in March,

the ZEW economic research institute said on Tuesday.

"Now we want to see PMIs and IFO next week, is business

confidence, output, new orders etc turning higher?" Broux said.

Germany's two-year bond yield, which is more

sensitive to European Central Bank rate expectations, ended the

day largely unchanged at 2.17%.

The legislation, which could propel Europe's largest economy

and spur growth across the region, still has to go to the

Bundesrat upper house, which is set to vote on Friday.

French bank BNP Paribas said on Tuesday that German 10-year

yields could rise to 4%, their highest since 2008, in the next

three years as the country issues far more bonds to fund the

extra spending.

Though there is still some way to go.

"The bigger question, but that will not be answered in the

short run, is how much of the money that has been agreed to

spend can be spent and at which time," said Peter Schaffrik,

global macro strategist at RBC Capital Markets.

Italy's 10-year bond yield was steady at 3.86%,

and the gap between the Italian and German 10-year bond yields

was 105 bps.

The closely watched spread between German and Italian yields

has been largely unaffected by recent ructions in markets, with

Italian yields broadly rising in line with the German.

"The market is not necessarily seeing this as a major spread

move, let's say Germany versus the rest, but as a real economic

boost lifting both boats so to speak," Schaffrik said.

The spread between the German and French 10-year bond yields

was at 68 basis points, which has narrowed from

the 84 basis points gap seen on March 5, with French fiscal woes

well down investors' list of concerns.

Markets are also watching closely the talks between U.S.

President Donald Trump and Russian President Vladimir Putin ,

amid Trump's attempt to convince his counterpart to accept a

ceasefire in Russia's war with Ukraine.

The days ahead are packed with major central bank decisions,

including by the Federal Reserve on Wednesday and the Bank of

England on Thursday.

Tariffs too remain a focus and markets are bracing for a

potential ramp up in the global trade war.

Trump has promised levies on autos beginning April 2, and

plans to implement a broader policy of reciprocal tariffs, where

the U.S. would match all levies on U.S. goods imposed by other

countries after tit-for-tat moves by the European Union, China

and Canada.

Whether or not those reciprocal tariffs will be introduced

and if so, to what degree, will be important for markets,

Schaffrik said.