Dec 6 (Reuters) - French debt risk premiums versus Bunds

dropped on Friday as hopes grew that France may end up with a

2025 budget approved by parliament, while the prospect of

European Union joint funding fuelled broader convergence among

bond yields.

French President Emmanuel Macron said he would appoint a new

prime minister in the coming days, and his top priority would be

getting a 2025 budget adopted by parliament.

Investors had worried the most likely outcome was an

extension of the 2024 budget to 2025, implying a less

restrictive fiscal policy which would have threatened the

government's ability to curb a burgeoning deficit.

The gap between French and German yields - a

gauge of the risk premium investors demand to hold French debt -

hit 72.40 basis points (bps), its lowest since Nov. 21. It was

last down 4 bps at 76.20 bps.

"Her (Marine Le Pen) comments suggest the political deadlock

may not be as stuck as suggested over the past few days," said

Michiel Tukker, senior European rate strategist at ING.

"Of course, these are just words, and reaching a credible

government budget that satisfies Le Pen's party will prove a

challenging task."

Far-right National Rally leader Marine Le Pen, who voted to

oust Barnier, said on Thursday that a budget could be passed

within weeks.

"Le Pen can bide her time, waiting to push for new

parliamentary elections in July next year," said Mark Dowding,

chief investment officer at RBC BlueBay. "In the short term,

this means that France remains a structurally deteriorating

credit," he argued.

RBC BlueBay said its positioning in OATs remains flat for

now, but it would look for opportunities to go short in 2025 if

spreads narrow.

Peripheral euro zone bond spreads also tightened following a

FT report that EU countries are discussing a 500 billion euro

joint fund for common defence projects and arms procurement.

The yield spread between Italian BTPs and safe-haven German

Bunds dropped to 105 bps on Friday, its lowest

level since Oct. 2021. It was last down 2.5 bps to 106.40 bps.

"BTPs are taking another major leap as prospects of more

joint funding on the European level for defence is boosting the

convergence trade," said Michael Leister, head of interest rates

strategy at Commerzbank.

"The convergence momentum (among euro area government bonds)

remains strong also given the overriding demand for carry."

Markets await U.S. payrolls later in the session that could

shape expectations for U.S. interest rates.

Germany's 10-year yield rose 2.5 bps to 2.12%

and was set to end the week 2 bps higher - on track for its

first weekly rise in over a month.

Markets await a European Central Bank policy meeting next

week.