* German-peripheral yield gap hits one-week high
* German Bund yield early hit 7-week high at 0.46 pct
* Constancio pours cold water on ECB policy shift bets
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Recasts, adds quote, updates prices)
By Jemima Kelly and Dhara Ranasinghe
LONDON, May 11 (Reuters) - The gap between the yields on German 10-year bonds and those of Spanish and Italian equivalents hit its widest in a week on Thursday, as investors sold out of risky assets on worries over tensions between North Korea and the United States.
The benchmark 10-year Bund yield had risen to 0.46 percent earlier in the day, its highest in seven weeks, as a spike in oil prices reinforced expectations that a pick-up in inflation could encourage the European Central Bank to step back from its ultra-loose monetary policy.
But as oil prices came off their highs later in the day, and after North Korea said it had a sovereign right to "ruthlessly punish" American citizens it has detained for crimes against its government system, investors bought back into safe-haven German debt, nudging the yield down to around 0.43 percent.
Riskier peripheral yields climbed, with the spread between Italian 10-year government debt and the German equivalent hitting 50 basis points for the first time in a week.
German Bund yields had earlier been given a brief lift, along with Treasury yields, by strong U.S. producer price inflation data and a fall in jobless benefit claims. That pointed to a tightening labour market and rising inflation that could spur the Federal Reserve to raise interest rates in June.
"Equities are softer, Treasury yields are down a basis point, and Bund yields are flat across the curve," said Rabobank rates strategist Richard McGuire. "Peripheral spreads are a bit wider which would be consistent with the risk-off tone."
Oil prices had earlier jumped as much as 1.5 percent, adding to a 3 percent-plus overnight gain, their biggest one-day jump since Dec. 1, following a steep drop in U.S. inventories and a bigger-than-expected cut in Saudi supplies to Asia.
That rally has helped boost the market's long-term euro zone inflation expectations, with the five-year, five-year, breakeven forward rising to almost 1.65 percent from a low on Monday just below 1.60 percent.
Analysts say the path for bond yields has turned higher as fading political risks and stronger data fuel talk that the European Central Bank could signal a policy shift when it next meets in June.
"What happens to oil and other commodities is very important going forward in determining the inflation profile," said Chris Scicluna, head of economic research at Daiwa Capital Markets.
"Clearly we've had a trend in place in yields for some time, with political risk being taken off the table after French elections, a steady stream of stronger data and the ECB expected to change its forward guidance in June."
ECB policymaker Vitor Constancio poured cold water on expectations for an imminent scaling-back of monetary stimulus, however, saying that keeping policy ultra-loose for longer is the safer way for the ECB to avoid the economy from turning negative again.
German 30-year bond yields hit their highest level since mid-March at around 1.25 percent.
Medium- and long-term German bond yields have risen roughly 30 bps in the past three weeks, a period that coincides with the conclusion of the French presidential election, a pick-up in global risk appetite and a shift in focus to the timing of U.S. rate hikes and the ECB's next move.
Elsewhere, Italy sold just over 7 billion euros of government debt, while the Bank of England said interest rates were unlikely to rise any time in the next two years.
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Reporting by Dhara Ranasinghe and Jemima Kelly; Editing by Catherine Evans