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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.

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 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 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 6 basis points (bps) to 53.5 bps.

France's 10-year yields were last 8.5 bps higher

at 3.19%, after hitting 3.2%, the most since November.

"Although other names have been mentioned, ex-ECB president

Mario Draghi, Italy's deputy prime minister Antonio Tajani or

even Romanian president Klaus Johannis, von der Leyen remains

the favourite, in our view," said Holger Schmieding chief

economist at Berenberg, referring to the Commission presidency.

The spread between Italian and German 10-year yields

widened 8 bps to 139 bps as Italy's 10-year yields

hit their highest since December at 4.056% and were

last up 9 bps at 4.04%.

The gap between Greek and German yields

widened 12 bps to 105, with equivalent Spanish and

Portuguese spreads widening about 3 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 edged higher as investors waited for U.S.

inflation figures ahead of a Federal Reserve policy meeting this

week, 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 one bp to 2.60%.

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 36.5 bps of easing in 2024

which implies one rate cut and a 46% chance of a

second move by December.