By Francesca Landini
MILAN, Oct 11 (Reuters) - Italy will pay slightly more thana month ago to borrow over three years at a bond auction onThursday, a sign of renewed doubts over the euro zone's abilityto end its debt crisis due to Spain's dithering over aid.
Italy's cost of borrowing over three years has sunk frompeaks around 5.3 percent in June and it has already found 80percent of the 460-465 billion euros it has to borrow this yearto finance a debt that is more than 120 percent of nationaloutput.
But the offer of up to 6 billion euros ($7.74 billion) ofthree-year paper and off the run bonds with maturities of up to13 years follows a sale of 11 billion of shorter-term debt thatsaw yields rise 25 basis points on Wednesday.
Worries over whether Italy and Spain can avoid fiscalcollapses that could down the euro have crept back intoinvestors' minds in the month since the European Central Banklaid out a decisive plan to buy the bonds of strugglinggovernments.
Spain is holding off making the formal request for aid thatwould trigger ECB action and there are little signs of pressurefrom other euro zone governments for it to get on with it. Thatcontrasts with the message of encouragement sent by ECB chiefMario Draghi last week, however, and expectations the bank willact sooner or later are keeping a lid on Italian yields.
"Yields on three-year bonds could rise perhaps a tad butnothing dramatic, given the relatively favourable EuropeanCentral Bank-driven backdrop for Spanish and Italian paper,"said Nicholas Spiro, director at Spiro Sovereign Strategy.
"What concerns us most is that sentiment remainssufficiently fragile for the recent differentiation betweenItaly and Spain to wane."
Having sold a new 15-year bond in mid-September, tapping asegment of the yield curve where demand is volatile, theTreasury will play it safer on Thursday by offering onlylong-dated notes that have been requested by specialist banks.
Rome will offer between 1.5 and 2.25 billion euros byreopening four-, six- and 13-year bonds that it no longer issueson a regular basis.
Coupon and bond repayments worth roughly 19 billion euroswill also help the sale. Its last auction of 3-year paper amonth ago saw yields of 2.75 percent.
The Treasury will come back to market next week with a newtranche of its four-year, Italian inflation-linked BTP Italia.
It sold a hefty 7.3 billion euros of similar linker bonds toretail buyers in March, but a second sale in June raised just1.7 billion euros as seasonal tax payments hit demand.
Rome has carefully studied the timing for this special offerand aims to capture heavy retail investors' demand and reach anupdated borrowing target for this year.
The head of the debt management office told Reuters onTuesday that the Treasury had raised its gross funding targetfor 2012 to 460-465 billion euros from a previous forecast of440-450 billion euros.($1 = 0.7751 euros)
(Additional reporting Alessia Pe, Elvira Pollina and GiulioPiovaccari in Milan; editing by Patrick Graham)
Keywords: ITALY DEBT/