* QE premium for euro zone bonds weakens
* Investors looking ahead to ECB tapering
* Heightened political risks also erode ECB buffer
* Safety blanket of ECB buying seen weakest in Portugal
* Two years of ECB QE on peripheral spreads: reut.rs/2kCZOqq
* Bond spreads this year: reut.rs/2kCRvej
By Dhara Ranasinghe
LONDON, Feb 8 (Reuters) - The powerful buffer of the ECB's bond-buying scheme is starting to weaken as political risks in the euro zone rise and investors bet the days of central bank stimulus are drawing to an end as inflation and growth pick up.
This is playing out in a sharp widening in government bond spreads. The gap between Italian and top-rated German 10-year yields has hit 200 basis points for the first time in three years, while the premium investors demand for holding French bonds over Germany is at 77 bps - up from 50 bps two weeks ago.
Without bond buying from the European Central Bank, euro zone yields would be roughly 20-50 bps higher, according to bank estimates. That's down from as much as 75-100 bps a year ago.
"The anaesthetic that is QE, that saw investors treat euro zone debt markets as a homogenous group, is now being removed," said Richard McGuire, head of rates strategy at Rabobank.
The ECB's 2.3 trillion euro ($2.5 trillion) asset-purchase scheme has underpinned bond yields in the single currency bloc, holding down borrowing costs and shielding vulnerable members from shocks such as last year's British vote to leave the European Union.
It also helps explain why 10-year bond yields in lower-rated Italy have traded below benchmark U.S. Treasury yields for some time.
Italian yields, at 2.28 percent, are about 8 bps below U.S peers, but speculation about ECB tapering means that gap has started to close as Italian yields rise sharply.
Societe Generale strategist Ciaran O'Hagan said one way to estimate the QE premium is to compare dollar-denominated bonds in the euro area with those outside the bloc but in the European Union, such as Poland's.
He estimates the ECB bond-buying is worth about 40 basis points to Spanish and Italian bonds.
"If you remove the programme tomorrow, I would expect a rise of 40-50 bps in yields more or less across the board," he said.
The ECB, which launched QE in March 2015, will lower its monthly asset purchases by 20 billion euros to 60 billion from April and keep the programme in place until year-end at least.
Euro zone inflation hit 1.8 percent year-on-year in January - just shy of the ECB's target of below but close to 2 percent.
While the ECB has played down the inflation pick up, stronger data generally and a perception that inflationary pressures are building means investors are looking ahead to when the ECB starts to wind down its massive stimulus. That means demanding a higher premium for holding bonds from those euro zone countries seen as most risky.
While it's premature to say that the QE premium will fade entirely while the ECB continues to buy bonds, analysts say the tapering fears mean that country-specific factors are starting to outweigh the positive impact of central-bank bond buying.
That has been evident this week in France, where the most unpredictable presidential race in decades has rattled investors and pushed 10-year yields to near 17-month highs.
Deutsche Bank says the fact that equity and credit markets have been relatively well behaved in the face of political jitters, suggests that the price action in French bonds has as much to do with taper worries as it does politics.
According to Rabobank estimates, ending QE would push up five-year Italian bond yields 58 bps, while equivalents in Spain and France would rise 22 and 20 bps each respectively.
Renowned bond investor Bill Gross said on Monday that without QE from the ECB and Bank of Japan 10-year U.S. Treasury yields would "rather quickly" rise to 3.5 percent.
For some, Portugal is the market to watch. The country, with its high debt levels and sluggish economy, is viewed as one of the weakest links in the euro zone and has in the past been most sensitive to any taper talk.
But the country is already benefiting less from ECB bond-buying than its peers because a shortage of eligible bonds has forced the ECB to slow down its purchases of Portuguese debt.
"Portugal is the canary in the coal mine for tapering," said ABN AMRO senior fixed income strategist Kim Liu.
"We know the ECB's limits for buying bonds there will be reached soon and this in combination with a lacklustre economic outlook means that spread has been very susceptible to upward pressure."
Portugal's 10-year bond yield is up about 40 bps this year, as are those in Ireland, another country where ECB bond-buying has slowed down recently. (Graphic by Nigel Stephenson; Editing by Catherine Evans)