The yield on 10-year Italian bonds fell from the euro era highs reached in November, settling slightly below the market-sensitive level of 7 percent in an auction on Thursday but failing to calm jitters over the country's ability to raise funds in the markets next year.
Italy sold just over 7 billion euros ($9 billion) in longer-dated bonds in the auction, against a planned range of between 5 billion and 8.5 billion euros.
The yield on the 10-year bond fell to 6.98 percent from November's 7.56 percent.
Yields on three-year Italian debt fell to 5.62 percent, much lower from 7.89 percent in a similar auction a month ago.
The euro pared some of its losses immediately after the auction but then dropped further to one-year low against the dollar. European shares were virtually flat in thin trading.
"Are we going to see in the next few weeks a significant rally in Italian bond yields? The answer is probably not," Bob Parker, a senior advisor at Credit Suisse, said.
The European Central Bank bought small quantities of Italian debt in the open market after the auction, dealers told Reuters.
Investors were looking to the auction to see whether appetite for the country's debt had returned, after yields halved in the sale of six-month T-bills on Wednesday.
Some analysts have warned about the dangers posed by the fact that around 193 billion euros of Italian debt is coming due next year, with 91.7 billion euros due to be refinanced between February and April.
Parker said his central scenario was that the country will get through it.
"Italy still has a very high domestic savings rate, the duration of its debt is over 6 years," Parker said.
But he also warned that other countries, when they were confronted with a series of failed auctions, had to ask for bailouts as yields on their debt jumped to unsustainable levels.
"What's the extreme event? The extreme event is that we could have a series of failed auctions," Parker said.
"There is a good 20-25 percent probability that a failure in a debt auction could send yields spiraling higher," he added.
Italian Prime Minister Mario Monti said the auctions were positive but warned that market volatility could continue, according to Reuters.
"Auctions held yesterday and today went rather well, but the financial turbulence absolutely isn't over," Monti said during a traditional end-year press conference.