UPDATE 1-Italian, Spanish yields hit lowest since last Fed meeting
* Italian, Spanish yields dip to pre-Fed meeting levels
Markets less fazed about Fed tapering impact on periphery
* Bunds weaker as European equities rise
By Marius Zaharia
LONDON, July 23 (Reuters) - Italian and Spanish 10-year bond yields hit their lowest levels on Tuesday since the last Federal Reserve meeting, when the U.S. central bank laid out plans to reduce monetary stimulus.
Since the June 18-19 meeting, Fed Chairman Ben Bernanke has made clear the plans were not set in stone and the European Central Bank has taken the unprecedented step of saying interest rates will stay at record lows for an "extended period".
The guidance from both central banks has eased investor fears that global liquidity could shrink to levels that would significantly damage the euro zone's weaker states.
Italian 10-year yields fell 4 basis points on the day to 4.30 percent, having hit their lowest since June 19 at 4.29 percent as trading began. Their Spanish equivalents also hit a five-week low, at 4.54 percent, and were last 2 bps lower at 4.57 percent.
"The market has certainly put Fed tapering into a better perspective," UniCredit rate strategist Luca Cazzulani said.
The yields were still about 30-40 bps above levels in May before Bernanke first hinted that the speed of Fed asset purchases could slow later this year. Analysts said yields were unlikely to go back to those levels.
"The bias is for lower yields, but one has to be careful though because the environment is different than it was a few months ago when investors expected abundant liquidity for a very prolonged period," Cazzulani said, adding he saw the floor for Italian yields at around 4 percent.
Portuguese yields paused following their biggest daily fall since Jan. 2 on Monday after President Anibal Cavaco Silva cooled a political crisis by ruling out early elections.
The 10-year yield was flat at 6.47 percent.
German Bund futures were 25 ticks lower on the day at 143.95 as European equities hit fresh seven-week highs.
Data releases later this week will be important for Bunds as they may show by how far the euro zone economic recovery lags that of the United States.
Euro zone manufacturing and services polls of purchasing managers are due on Wednesday, while the German Ifo business sentiment survey is due on Thursday.
"The market remains vulnerable to surprises in PMIs as that is something the European Central Bank is looking at," said Jan von Gerich, fixed income chief strategist at Nordea.