UPDATE 1-Italy's two-year debt costs soar as Fed stirs risk fears
(Adds analyst comment, market reaction and details)
MILAN, June 25 (Reuters) - Italy's two-year borrowing costs soared to their highest level since September 2012 at an auction on Tuesday, more than doubling what was paid at the nearest, roughly comparable auction.
It reflected global pressure on riskier debt after the U.S. Federal Reserve signalled it would slow asset purchases by the end of this year.
Rome sold 3.5 billion euros ($4.6 billion) of new zero-coupon bonds maturing on June 30, 2015 at a yield of 2.40 percent.
A month ago the treasury paid 1.11 percent, a euro-lifetime low, to sell zero-coupon bonds though they had a maturity that was six months shorter than the new bonds.
In May, peripheral euro zone bonds still enjoyed strong investor appetite fuelled by the huge liquidity injected by central banks around the world and the European Central Bank's pledge to buy bond of weaker euro zone economies if needed.
Since the end of May, however, prospects of a withdrawal of the monetary stimulus by the U.S. central bank has put an end to a global rally, pushing up debt costs generally as well as for Italy and other peripheral euro zone countries.
"The result of this morning's sale, with a sharp rise in the yield and a fall in demand, underscores the growing fears about the adverse consequences of a withdrawal of liquidity," said Nicholas Spiro, managing director at Spiro Sovereign Strategy.
"Europe is particularly at risk because of the persistent recession in the single currency area."
After the auction, the premium Italian 10-year bonds pay over safer German Bunds widened to 300 basis points, a psychological threshold that was surpassed on Monday afternoon for the first time since mid-April.
Italian bond market could also suffer in the coming weeks should tensions emerge in the fragile left-right Italian coalition government after former prime minister Silvio Berlusconi was handed a seven-year jail sentence on Monday.
"On the domestic front, Mr Berlusconi's conviction adds another layer of political risk at a time when the government is deeply divided over fiscal policy and Italy's economy remains mired in recession," Spiro said.
Italy also sold on Tuesday the top-planned amount of two inflation-linked bonds with the yield on the five-year BTPei bond rising to 2.91 percent from 1.83 percent at a similar auction one month ago. ( $1 = 0.7637 euros)
(Editing by Stephen Jewkes/Jeremy Gaunt)