LONDON - Benchmark Italian yields fell on Monday after a report that the European Central Bank was planning a new bond-buying programme to help vulnerable economies even as it is likely to discuss potential rate hikes to tame surging inflation later this week.

After Italian 10-year bond yields posted their biggest weekly rise since March 2020 last week, they fell 6 basis points (bps) to 3.34% on Monday from the November 2018 high of 3.414% touched on Friday.

A report that the ECB was set to strengthen its commitment to prop up vulnerable member states' debt markets if they were hit by a bond sell-off encouraged some trading volatility.

The Financial Times reported, without citing named sources, that the ECB was preparing a proposal to create a new bond-buying programme to help, if needed, countries facing rising borrowing costs, such as Italy.

"Italian bonds are caught between two opposite forces: they widened last week, almost mechanically, as more hawkish ECB expectations set in, only to tighten this morning on the back of that FT article saying the ECB is getting closer to (agreeing) on a sovereign spreads management facility," said Antoine Bouvet, senior rates strategist at ING, referring to bond spreads.

"Whether today's tightening can be sustained depends on how specific the ECB will be this week. I'm not holding my breath but even a firm commitment to put in place such a facility, without giving details, would be helpful."

Investors have ramped up their bets on 2022 ECB interest rate rises since the latest price data showed euro zone inflation hit a record 8.1% in May.

On Monday, money markets priced in 130 bps of hikes by year-end, and were pricing in a bigger, 50 bps rise at one of the bank's policy meetings by October.

BofA Securities said in a note on Monday they now expected the ECB to raise interest rates by 150 bps this year including half-point moves in July and September.

The spread between 10-year Italian and German bond yields was steady on the day at around 207 bps, after hitting a two-year peak of 230 bps last week.

Germany's 10-year bond yield, the euro zone's benchmark, briefly touched a new high since 2014 in early London trading. It was flat at 1.27% at 1115 GMT.

In the meantime, in another market on the euro zone's periphery, the 10-year Spanish bond yield fell 2 bps to 2.41% after briefly touching a seven year high of 2.439% when markets opened on Monday.

(Reporting by Joice Alves; Editing by Bradley Perrett and Tomasz Janowski)