By John Geddie
LONDON, Dec 2 (Reuters) - Investors appear to be having some last-minute reservations about the gulf created between Italy and its euro zone peers in debt markets before the country's weekend referendum that may once again go against consensus or deliver unclear outcomes.
The same appears to be true of Austria, which on Sunday holds a presidential election that could see Norbert Hofer of the Freedom Party become the first far-right head of state freely elected in western Europe since World War Two .
Financial markets ended up on the wrong side of Britain's vote to leave the European Union in June and Donald Trump's victory in the U.S. presidential election last month.
They will be hoping the third time is lucky on Sunday, having sided with bookmakers and pollsters that expect Italian voters to reject a constitutional reform on which Prime Minister Matteo Renzi has staked his career.
But even if Renzi loses, fresh elections are not a given. President Sergio Mattarella could urge Renzi to stay, mandate another centre-leftist to form a new government or even try to persuade Silvio Berlusconi's centre-right party to join or support a caretaker or technocratic government.
The gap between Italian and German bond yields -- which shot to a 2 1/2-year high of 188 basis points (bps) last week -- fell to 167 bps on Friday. The gap between Austria's and Germany's bonds dropped to 26 bps, having been at a near 10-month high of 33 bps last week.
"I suspect on Monday it will be very difficult to have a definitive opinion on what could be the future government in Italy and the appetite for further reform," said Franck Dixmier, global head of fixed income at AllianzGI, adding that the fund was 'short' Italian bonds and had no exposure to Austria.
"The 'no' is clearly embedded in the current spread, but on top of the no what will be important is the outlook provided in terms of the appetite for new general elections."
Analysts said firm demand at an Italian debt sale on Tuesday showed that some investors were scrambling to cover their short positions in futures markets, which are on a scale not seen since the 2011/2012 euro debt crisis. http://reut.rs/2fLW0lO
Shorting, or selling a borrowed asset, is a technique used to bet that the value of an asset will decrease.
German 10-year bond yields -- the euro zone benchmark -- continued their rise after a deal to curb oil production fed expectations for higher inflation, and central bankers weighed up whether to signal the end of monetary stimulus.
Yields rose 1 basis points to 0.34 percent, edging towards a 10-month high of 0.40 percent.
Italian yields, meanwhile, edged down 5 bps to 1.99 percent while Austrian equivalents were flat at 0.60 percent, according to Tradeweb data.
There was some relief too in Italian stocks -- the worst performing index in the developed world this year -- after shares rose to a three-week high on Thursday.
For Reuters new Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets (Editing by Larry King)