Strong demand at Italian debt sale reflects Renzi hopes

* Italy sells 9 bln euro of debt

* Stellar auction offers an endorsement of Renzi govt

* Positive ratings view, ECB outlook support demand

* Peripheral debt benefits from fresh EM concerns

* Bund futures rise as geopolitical tensions mount

(Updates prices into close, adds fresh comment)

LONDON/MILAN, Feb 27 (Reuters) - Italy's 10-year borrowing costs slid to their lowest in more than eight years at a well bid bond sale on Thursday in a further investor endorsement of the new government's ambitious reform plans.

With appetite for emerging market assets also soured by tensions between Ukraine and Russia, investors snapped up the 9 billion euros of the still relatively high-yielding Italian 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 government in Rome, which is perceived to be reform-minded, 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 October 2005 and some 5 basis points below secondary market levels. Yields on the current 10-year bond fell 8 bps to 3.46 percent after the auction, their lowest since January 2006.

Thursday's auction came 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 are still 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 meagre returns. This was the second so-called "technically uncovered" auction in a row after last week's 10-year sale.


Other factors spurred demand for low-rated debt.

A drop in German inflation to a 3-1/2 year low hinted at subdued inflation for the whole euro zone in February. The regional data is due on Friday and if it shows a further fall it could fuel bets for further European Central Bank monetary policy easing to ward off the threat of deflation.

Spanish 10-year yields fell 4 bps to 3.50 percent and Irish equivalents dropped 7 bps to 3.10 percent.

Junk-rated Portuguese yields were 4 bps down after Lisbon bought back 1.32 billion euros of bonds in a move 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 61 ticks on the day to 145.07, with German 10-year yields 5 bps down to 1.57 percent.

"We've got two factors (at play): the Ukrainian issue ... and the inflation numbers reviving hopes the ECB might do something next Thursday," said David Keeble, global head of fixed income strategy at Credit Agricole in New York.

(Editing by Nigel Stephenson and Susan Fenton)