* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr MILAN, Feb 5 (Reuters) - Italy’s 10-year bond yields fell to more than three-week lows on Friday, set for the biggest weekly decline since October, as former European Central Bank president Mario Draghi began talks on forming a new government and the tone in world markets remained upbeat. Trade in euro zone debt markets was generally subdued ahead of January U.S. payrolls data due at 1330 GMT. Global shares traded near record highs on Friday, as progress in vaccine distribution prompted bets on further normalisation. That backdrop boosted sentiment towards risk assets such as peripheral European bonds, with Italy set to end the week on a high note following this week’s political developments. Draghi, given a mandate to form a new Italian government, started talks on Thursday as the largest party in parliament, the 5-Star Movement, softened its initial hostility to his appointment. Italy’s 10-year bond yield fell almost 2 basis points to 0.543%, its lowest level since Jan. 11. It is down almost 11 bps this week and set for the biggest weekly fall since October. The gap between German and Italian 10-year bonds yields traded at 99.5 basis points, having fallen on Thursday below 100 bps for the first time since mid-January. UniCredit analysts said this week’s rally in Italian bonds raised questions over how much more yields could fall and the spread over Bund yields tighten. “This will likely depend on two related developments: 1. the extent of parliamentary support the government will enjoy and 2. foreign investors’ willingness to increase their exposure to the BTP market again,” they said in a note. “The 2015 lows of 88 bps for the 10Y BTP-Bund spread do not seem to be out of reach.” Meanwhile, news of a fall in German industrial orders in December put some downward pressure on German yields. Orders for German-made goods fell more than expected, ending a seven-month streak of positive data as restrictions to contain the coronavirus dragged down demand from other euro zone countries. The 10-year Bund yield was lower at -0.46%, not far from the highest level since September, and was set for the biggest weekly jump since mid-December. Germany’s 30-year bond yield was down almost one basis point at -0.004% after trading briefly in positive territory this week. “Today’s industrial orders data gives a first impression of how the stricter lockdown measures since mid-December have hit the economy,” ING analysts wrote in a report. Focus turned to U.S. payrolls data, with economists polled by Reuters forecasting an increase of 50,000 new jobs after a decline of 140,000 in December.