French stocks, bonds tumble as government faces likely collapse

LONDON, Aug 26 (Reuters) - French stocks tumbled, particularly banks, and the country's bonds tumbled on Tuesday as France's minority government looked increasingly likely to be ousted next month.

Three main opposition parties said they would not back a confidence vote which Prime Minister Francois Bayrou announced for September 8 over his plans for sweeping budget cuts.

France's blue chip CAC40 index was last down nearly 2% .FCHI having fallen 1.6% late on Monday, with banking giants BNP Paribas BNPP.PA and Soociete Generale SOGN.PA each down more than 6%.

France's 10-year government bond yield rose around 4 basis points to around 3.53%, its highest since March FR10YT=RR. When a bond's yield rises, its price falls.

The gap between French and German 10-year yields, a gauge of the premium investors require to hold French debt, meanwhile widened to around 79 bps -- its largest since April. FR10DE10=RR

Analysts had anticipated a return in French political risk in the autumn as the government tries to secure support for steps to improve France's fiscal position. But Monday's developments came as a surprise.

If Bayrou loses the confidence vote in the National Assembly, his government will fall. President Emmanuel Macron could then name a new prime minister, ask Bayrou to stay on as head of a caretaker government, or he could call a snap election.

"We see increased volatility and pressure on French (bond) spreads in the coming days," said Mohit Kumar chief European economist at Jefferies in a morning note.

The gap between French and Italian 10 year yields, which was around 150 bps two years ago, is now just 9 bps. FR10IT10=RR

But French Finance Minister Eric Lombard said on Tuesday he was "certainly not resigned" to the idea of Prime Minister Francois Bayrou's minority government falling next month.

Lombard also suggested there was a risk the IMF would have to intervene in the economy if the government falls.

"We are right in the thick of the battle," Lombard told France Inter radio.