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Investors snap up Italian 10-year debt on Renzi hopes, Ukraine worries

* Italy sells 9 bln euro of debt, including new 10-yr benchmark

* Stellar auction offers further endorsement of Renzi's government

* Positive ratings view, ECB outlook support demand

* Peripheral debt benefits from fresh EM concerns

* Bund futures rise as geopolitical tensions mount

LONDON/MILAN, Feb 27 (Reuters) - Italy's 10-year borrowing costs slid to their lowest in over 8 years at a hefty bond sale on Thursday, in a further endorsement by investors of the new government's ambitious reform plans.

With appetite for emerging market assets soured by tensions between Ukraine and Russia, investors snapped up the 9 billion euros of bonds offered. Safe-haven German Bunds were also in demand.

Lower-rated euro zone bonds have benefited from recent positive news in the currency bloc, including the naming of a new reform-minded government in Rome and improved credit ratings and outlooks for Spain and Italy.

Italy sold the new 10-year bonds at a yield of 3.42 percent, the lowest since Oct. 2005 and some 5 basis points below secondary market levels. Yields on the current 10-year bond fell 7 bps to 3.46 percent after the auction, their lowest since January 2006.

Thursday's auction comes after Italy raised up to 12 billion euros earlier this week, the first sale under Matteo Renzi's premiership after Enrico Letta's resignation last week.

Renzi won two confidence votes in parliament this week, vowing to cut labour taxes and pass wide institutional reforms.

"Clearly the market is giving Renzi the benefit of the doubt. It also shows more broadly despite evident and widespread tensions in the emerging world, the periphery remains well insulated from that," said Richard McGuire, senior fixed income strategist at Rabobank.

"You could argue that it is benefiting possibly from positive contagion as investors in emerging markets eschew the risks there but still are unwilling to forgo the returns that those markets offer which leaves the periphery sitting pretty."

With German 10-year yields a mere 4 basis points above 2014 lows of 1.51 percent, yield-hungry investors were increasingly snapping up lower-rated euro zone bonds.

Italy's robust bond auctions contrast with German's 30-year bond sale on Wednesday which was shunned by investors for the "painfully" low returns on offer. This was the second so-called "technically uncovered" auction in a row after last week's 10-year sale.

ECB BETS

Other factors spurred demand at the Italian auction. Soft euro zone inflation numbers from German's main regions hinted at falling price pressures in the currency bloc in February. The German national data is due at 1300 GMT, a day before the euro zone reports which, if they undershoot forecasts, would fuel bets for further European Central Bank monetary policy easing.

"Ahead of the German inflation data, the market is betting on the fact that the ECB will somehow ease its policy stance next week," said Chiara Cremonesi, a strategist at UniCredit.

"Also, rating agencies have started changing their assessments of peripherals and we've seen some upgrades. The impression is that foreign investors are getting back in, because when one sees such violent rallies, the fear is to be left out."

Spanish 10-year yields fell 3 bps to 3.51 percent and Irish equivalents dropped 7 bps to 3.10 percent.

Junk-rated Portuguese yields were 6 bps down after Lisbon bought back 1.32 billion euros of bonds in a step aimed at easing its near-term financing needs as it readies to leave behind an international bailout in May.

Further sabre-rattling by Russia, which on Thursday put fighter jets along its western borders with Ukraine on combat alert, gave impetus to this week's rally in German Bunds and other low-risk euro zone bonds.

Bund futures jumped as much as 87 ticks on the day to 145.33 pushing German 10-year yields 6 bps down to 1.56 percent.

"We have the German CPI and we also had these headlines about Russian jets on combat status and all this is making for a constructive market," a trader said. "The weaker inflation numbers we get, the more chance we get of an ECB response next week so there's no reason for Bunds to sell off."