* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates prices) MILAN, Jan 19 (Reuters) - Italian government bond yields dropped sharply on Tuesday, ahead of a confidence vote in the upper house that was expected to avert a collapse of prime minister Giuseppe Conte’s government. Expectations that snap elections were unlikely, coupled with ECB stimulus to fight the adverse impact of the pandemic, had already limited limited any selloff of Italian government bonds. Conte won a confidence vote in the Chamber of Deputies on Monday as he clung to power after a junior partner quit the ruling coalition and triggered a political crisis. On Tuesday, he was set to survive an upper house confidence vote as unaligned senators responded to his call not to sink the government in the midst of the pandemic. Italy’s 10-year government bond yield was down 5 basis points at 0.552% in late trade., pushing the closely watched gap with German 10-year yields down to 107 basis points, down from seven-week highs above 118 basis points touched last week. “Conte is likely to pass today’s confidence vote with a simple majority if Italia Viva abstains as promised,” Citi analysts said, referring to the party of former premier Matteo Renzi, who caused the government to lose its majority. However, with abstentions rather than an absolute majority expected to keep the government afloat, focus will be on the exact tally to see how stable the government will be. “In the event that the vote passes with a simple majority, the focus will be on how far it falls short of an absolute majority, in order to understand the risk of political instability in the near future,” Unicredit analysts said. But investors expect appetite for high-yielding Italian bonds would prevail even in the worst-case scenario. “With snap elections the spread is likely to jump to 150 basis points, but after that, new buyers will come to the market and the spread will gradually move versus previous levels,” said Anna Guglielmetti, head of institutional portfolio management Italy at Credit Suisse. The ZEW survey of investors’ economic sentiment in Germany increased to 61.8, beating expectations of a rise to 60.0 , without an immediate effect on bond prices. Germany’s 10-year government bond yield was last unchanged at -0.53%. Focus is also on U.S. Treasury secretary nominee Janet Yellen, who will tell the Senate on Tuesday that the government must “act big” with its next coronavirus relief package, while she is expected to face questions over President-elect Joe Biden’s tax and spending proposals.