* Irish 10-year yields fall to new record low below 3 pct
* First debt auction since bailout finds strong demand
* Auction marks normalisation of Ireland's market access
LONDON, March 13 (Reuters) - Irish government bond yields hit record lows on Thursday as Dublin's first regular debt auction since its 2010 international bailout drew substantial demand, cementing a return to full access to borrowing markets.
Ireland sold 1 billion euros ($1.4 billion) of 10-year bonds at a record low average yield of 2.967 percent - a lower premium than that offered in secondary markets, where investors trade debt that has been already issued.
Demand was 2.9 times higher than the amount sold and came from "the full spectrum of investors," including pension funds and insurers, which tend to hold on to the paper for longer than banks and hedge funds, traders said.
The solid result came even as growing tensions between Russia and Ukraine over its Crimea region sent investors scurrying into safe-haven German Bunds, driving their 10-year yields near six-week lows around 1.54 percent.
The auction marks the end of a three-year hiatus for Ireland as investors return to markets they fled at the height of the euro zone debt crisis in 2011 and 2012.
"It's a pretty solid start," said Orlando Green, a strategist at Credit Agricole. "There's been good appetite for Irish bonds in the market even in the secondary market for some time. It does bode well for them to be able to carry out auctions as they used to before the bailout."
Ireland was forced take a bailout in 2010 as many investors shunned the country's bonds fearing its property market crash could push the indebted sovereign to the brink of default.
But it pushed through drastic budget measures swiftly, while the European Central Bank eased worries about the euro zone's future with its conditional promise in 2012 to buy a country's bonds if it got into trouble.
With the economy recovering, investors have bought heavily into the Irish success story in the past year and ratings agency Moody's restored investment grade status in January.
"They have turned the corner," said Christoph Kind, head of asset allocation at Frankfurt Trust, a firm which bought back Irish bonds following the Moody's upgrade and remains "constructive" on that market.
Ten-year yields last traded 3 basis points lower on the day at 3.2 percent, having hit an all-time low of 2.981 percent at the start of the day. Traders said many investors bought Irish bonds before the auction fearing they may not be able to get anything from the sale.
"We've seen persistent buying even before the auction, from international real money accounts, domestic banks, all across the board. There's still scope for Ireland to rally further," one London-based trader said.
Data showing a shock 2.3 percent economic decline in the fourth quarter had limited impact as it was offset by an upward revision of third quarter figures. Analysts said 2014 data such as falling unemployment suggest the recovery continues at a strong pace.
SOLID ITALY AUCTIONS
Ireland is already funded into 2015 as it has sold debt via syndicates of banks in 2013 and early in 2014.
It is resuming regular bond auctions partly to show it has regained the market's confidence and can rely on steady interest from a large pool of investors. In syndicated debt sales, banks put more effort into rounding up bidders and have more time to do it.
Ireland's funding target for this year is 6-10 billion euros, with 4.75 billion already raised.
Italy also sold bonds on Thursday. It raised 75 billion euros, paying record low yields on three- and 15-year debt, a day after new Prime Minister Matteo Renzi approved sweeping tax cuts to revive the economy.
Italian yields were 2 basis points lower at 3.40 percent, slightly above eight-year lows of 3.365 percent hit last week.