(Corrects para 10 to say Spanish, Portuguese yields up 5 basis points, not 2 bps) * Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr LONDON, Dec 1 (Reuters) - German and Italian government bonds were set for their worst session in three weeks on Tuesday as brighter sentiment in world markets dented demand for fixed income. A bipartisan group of U.S. senators and members of the House of Representatives on Tuesday proposed a $908 billion COVID relief bill that would fund measures through March 31. The news, seen as boosting prospects for economic recovery, increased demand for riskier assets such as stocks and hurt safe-haven U.S. Treasuries. This in turn encouraged a sell-off of euro zone government bonds, European analysts said. Germany’s 10-year yield rose some 5 basis points to as high as -0.519%, its highest in over two weeks. Ten-year U.S. Treasury yields were up 8 bps. Italy’s 10-year bond yield rose around 6 basis points to 0.64%, the highest in over two weeks.. Both German and Italian 10-year bonds were set for their biggest daily jump since Nov. 9, when news that Pfizer’s COVID-19 vaccine is highly triggered the biggest sell-off in German bonds since March. “Euro rates have no business rising. Clearly they can’t be completely decorrelated with dollar (rates)... but honestly I don’t think they are going anywhere,” said Antoine Bouvet, a senior rates strategist at ING in London, citing expectations of additional stimulus from the European Central Bank next week. In addition to broad pressure on bonds from the stimulus news, analysts said some unease about whether a pandemic recovery fund will be passed by an EU summit next week could be weighing on peripheral debt. Portuguese and Spanish 10-year bond yields were up about 5 bps each, pulling away from recent lows. . ADVERTISEMENT Poland and Hungary are currently blocking about 1.8 trillion euros’ worth of EU funds, including the recovery fund. “What’s continuing to weigh on the periphery a little is that there is no progress on the Next Generation EU fund,” said Christian Lenk, a rates strategist at DZ Bank. “As time ticks on, this becomes more of a concern.” Early in the day, a flash estimate showed euro zone consumer prices fell by more than expected in the fourth consecutive month of negative annual inflation. But that did not stop a long-term gauge of euro zone inflation expectations from rising to its highest since August at over 1.24%. Bert Colijn, senior economist for the euro zone at ING, said ECB macroeconomic projections due next week will push back forecasts for an already painfully slow recovery in inflation. “As this has been the base case for some time now, it will without a doubt make the ECB loosen policy once again,” he told clients. Reporting by Dhara Ranasinghe and Yoruk Bahceli; Editing by Kevin Liffey