UPDATE 1-Italy's one-year debt costs hit 4-month high after S&P
MILAN, July 10 (Reuters) - Italy's one-year debt costs rose to their highest level since March at an auction on Wednesday, a day after Standard & Poor's cut Italy's sovereign credit rating to two notches above junk.
The Treasury sold 7 billion euros of one-year bills, paying a yield of 1.078 percent, up from 0.96 percent at a similar sale one month ago.
Demand was fairly strong with a bid-to-cover of 1.56, up from 1.49 at mid-June sale.
On Tuesday S&P cut Italy's sovereign debt to BBB from BBB-plus, citing concerns about prospects for an economy stuck in its worst recession since World War Two.
The euro zone's third-largest economy has been one of the slowest-growing in the world for more than a decade, shackled by a lack of competitiveness, a weak political system and a public debt topping 130 percent of gross domestic product.
Italian Prime Minister Enrico Letta has pledged to ease the severe austerity policies pursued by predecessor Mario Monti's technocrat government and cut youth unemployment, while respecting the tight spending limits imposed by European Union budget rules.
But the recession has made it more difficult for him to meet EU targets while satisfying the demands from his broad, left-right coalition for tax cuts.
"This highlights the need to accelerate the implementation of structural reforms in the whole euro zone," ECB board member Christian Noyer said on Wednesday in a comment on Italy's downgrade.
Rome also issued 2.5 billion euros of bills maturing on Dec. 19, 2013, at an interest rate of 0.599 percent. These assets, dubbed 'flexible bills', are issued by the Treasury from time to time to cover seasonal liquidity needs.
Italy will return to the primary market on Thursday to sell up to 6.5 billion euros in three and 30-year bonds and floating rate certificates in a triple-sale.
Rome, which has froantloaded its funding, has already sold more than 63 percent of its overall borrowing needs for 2013.