By Richard Hubbard
LONDON (Reuters) - European shares extended losses and Italian bond yields rose on Wednesday after Italy's borrowing costs jumped at a debt sale and data showed that euro zone factory output fell sharply in January.
Italy sold 5.32 billion euros of new three- and 15-year government bonds at the auction, paying the highest yield since last December for the shorter term debt.
The subdued demand at Italy's first debt sale since it was down downgraded by ratings agency Fitch sent the benchmark 10-year Italian bond yield up 8 basis points to 4.68 percent.
"Overall this is a weak auction result," said Lyn Graham-Taylor, a fixed-income strategist with London-based Rabobank.
"It may be that investors have been spooked by the ongoing political uncertainty in Italy."
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Italy has been without a government since inconclusive elections late last month, raising fears over its ability to pursue much-needed reforms and underlining a Bundesbank warning on Tuesday that the euro zone crisis was far from over.
The worries over the region's outlook was also reflected in a German auction of new two-year bonds, which sold at an average yield of just 0.06 percent, compared with 0.21 percent on February 13, demonstrating demand for safe-haven assets.
Industrial production data for January in the 17 countries added to the concerns, falling a surprisingly sharp 0.4 percent from December, according to the EU's statistics office Eurostat. Economists polled by Reuters had expected a 0.1 percent fall.
SHARES SLIDE
The weak data and rising Italian bond yields sent the pan-European FTSEurofirst 300 share index down 0.4 percent.
Italy's main share index, the FTSE MIB, was down 0.9 percent at a one-week low. London's FTSE 100, Paris's CAC-40 and Frankfurt's DAX opened down as much as 0.8 percent.
A subdued showing on Wall Street on Tuesday - where the Dow Jones Industrial Average managed only the slightest of gains after seven straight solid rises - and a sell-off in Tokyo had already made European investors more cautious.
U.S. stock index futures are pointing to a slightly lower open when Wall Street resumes trading, with U.S. retail sales data for February key to whether the rally that started after Friday's strong jobs report will continue.
The debt auctions and weak data saw the euro give up its early gains against the dollar to be little changed at $1.3010, well within the $1.2955-$1.3135 range seen this month.
Against the yen, the euro fell 0.3 percent to $1.2452. The Japanese currency has been under pressure on prospects for much bolder monetary easing from the Bank of Japan, but some investors were taking profits after the fall.
In the commodity market oil rose slightly as expectations of steady global consumption growth and a surprise fall in U.S. stockpiles helped keep Brent crude above $109 a barrel.
"Downside risks for oil seem to be very limited," said Tetsu Emori, a commodities fund manager at Astmax Investments. "I think oil prices have bottomed out, and overall we will see a recovery."
But a report from the International Energy Agency (IEA) that production in the United States would be enough to protect against most potential supply shocks capped prices.
Brent crude was flat at $109.70 a barrel, while U.S. oil rose 27 cents to $92.81, gaining for a fifth day in the longest daily winning streak since mid-December.
Copper prices in London were also little changed at around $7,833.50 a tonne. Spot gold gained 0.25 percent to $1,596 an ounce.
(Editing by Will Waterman)