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By Yadarisa Shabong and Lucy Raitano

March 18 (Reuters) - Germany's government bond yields held steady near multi-month highs Tuesday as the country's parliament voted to approve a historic spending splurge, which will lead to a dramatic increase in bond issuance.

Berlin signed off on plans for a massive increase in spending that throws off decades of fiscal conservatism in hopes of reviving economic growth and scaling up military spending for a new era of European collective defence.

European yields have jumped sharply since the proposals were announced, with the German 10 year yield reaching as high 2.938% last week, its highest since October 2023.

It was last 2.815%, up one basis point on the day, walking most of a small early gain.

That "tells you that the vote was priced in, ditto for the German ZEW, not usually a market mover," said Kenneth Broux, head of corporate research FX and rates at Societe Generale.

German investor morale improved more than expected in March, the ZEW economic research institute said on Tuesday.

"Now we want to see PMIs and IFO next week, is business confidence, output, new orders etc turning higher?" Broux said.

Germany's two-year bond yield, which is more sensitive to European Central Bank rate expectations, ended the day largely unchanged at 2.17%.

The legislation, which could propel Europe's largest economy and spur growth across the region, still has to go to the Bundesrat upper house, which is set to vote on Friday.

French bank BNP Paribas said on Tuesday that German 10-year yields could rise to 4%, their highest since 2008, in the next three years as the country issues far more bonds to fund the extra spending.

Though there is still some way to go.

"The bigger question, but that will not be answered in the short run, is how much of the money that has been agreed to spend can be spent and at which time," said Peter Schaffrik, global macro strategist at RBC Capital Markets.

Italy's 10-year bond yield was steady at 3.86%, and the gap between the Italian and German 10-year bond yields was 105 bps.

The closely watched spread between German and Italian yields has been largely unaffected by recent ructions in markets, with Italian yields broadly rising in line with the German.

"The market is not necessarily seeing this as a major spread move, let's say Germany versus the rest, but as a real economic boost lifting both boats so to speak," Schaffrik said.

The spread between the German and French 10-year bond yields was at 68 basis points, which has narrowed from the 84 basis points gap seen on March 5, with French fiscal woes well down investors' list of concerns.

Markets are also watching closely the talks between U.S. President Donald Trump and Russian President Vladimir Putin , amid Trump's attempt to convince his counterpart to accept a ceasefire in Russia's war with Ukraine.

The days ahead are packed with major central bank decisions, including by the Federal Reserve on Wednesday and the Bank of England on Thursday.

Tariffs too remain a focus and markets are bracing for a potential ramp up in the global trade war.

Trump has promised levies on autos beginning April 2, and plans to implement a broader policy of reciprocal tariffs, where the U.S. would match all levies on U.S. goods imposed by other countries after tit-for-tat moves by the European Union, China and Canada.

Whether or not those reciprocal tariffs will be introduced and if so, to what degree, will be important for markets, Schaffrik said. (Reporting by Yadarisa Shabong in Bengaluru; Editing by Andrew Heavens and Angus MacSwan)