UPDATE 1-Italy six-month yields fall as ECB outweighs politics
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MILAN, Sept 26 (Reuters) - Italy paid the lowest yield since May on Thursday to sell six-month bills as the ECB's pledge to keep short-term market rates low helped it shrug off reviving domestic political tensions ahead of a sale of longer-term bonds.
Italy sold the planned 8.5 billion euros in bills at an average 0.78 percent yield, down from 0.89 percent a month ago. The sale was covered 1.5 times, matching the previous auction.
Fresh tensions within Italy's fragile left-right ruling coalition could weigh more on a sale of up to 6 billion euros of five- and 10-year bonds scheduled for Friday, analysts said.
"It's a good auction but domestic demand has the lion's share of shorter maturities so it does not tell us much about market feeling," said ING strategist Alessandro Giansanti.
"Friday's situation is slightly different, especially when it comes to the 10-year bond. We'll have to see."
Foreign investors account on average for about half of demand at Italian auctions, according to the Treasury. Foreign appetite plays a bigger role in sales of longer-term bonds as domestic bids tend to favour short and medium-term maturities.
Italian bond yields rose on Thursday after allies of former premier Silvio Berlusconi made a fresh pledge on Wednesday night to resign if a special Senate committee meeting on Oct. 4 voted in favour of stripping Berlusconi of his seat due to a tax-fraud conviction.
Ten-year yields rose 8 basis points to 4.31 percent, widening the yield spread with equivalent German bonds by 6 basis points to 252 basis points.
The head of debt management at the Treasury said this week a more stable political situation would help reduce debt costs.
Before the latest flare-up in the coalition of former enemies, a respite in political tensions had reinforced a trend of falling yields driven by the Federal Reserve's surprise decision last week to keep its monetary stimulus unchanged.
Offering further support to bonds, European Central Bank President Mario Draghi said this week the ECB was ready to use any tool to keep short-term rates low, including another offer of cheap long-term loans to banks.
"The ECB stance is a strong support factor for the front end of periphery curves," UniCredit analysts wrote in a note.
On Wednesday Italy's two-year yields also fell to their lowest since May at an auction of zero-coupon paper.
(Additional reporting by Irene Chiappisi; Editing by Catherine Evans)