* Fitch upgrades Spain by one notch to 'A-'
* Spain/German 10-yr yield gap tightest since 2015
* S&P lifts Greek long-term ratings for 1st time in 2 yrs
* Thursday's ECB meeting awaited
* Euro zone periphery govt bond yields http://tmsnrt.rs/2ii2Bqr (Updates throughout)
LONDON, Jan 22 (Reuters) - Spain's borrowing costs fell to six-week lows and short-dated bond yields in Greece tumbled on Monday, after ratings upgrades for the two southern euro zone states provided further evidence of a turnaround for the bloc's peripheral economies.
Fitch upgraded Spain's credit rating to "A-" with a stable outlook late on Friday, citing a broad-based economic recovery and limited impact on the economy from Catalonia's independence bid. It was Spain's first "A" rating from one of the top three ratings agencies since the euro zone debt crisis.
S&P Global Ratings, releasing its review on Greece after Friday's market close, lifted Greek long-term, foreign currency ratings for the first time in two years on improvements in the finances and fiscal outlook for the debt-laden nation .
"The fact that it is the first ratings upgrade in two years is a political win for government and the euro zone," said Patrick O'Donnell, an investment manager at Aberdeen Asset Management in London, referring to the Greek upgrade.
On a day when most euro zone government bond yields headed higher, alongside U.S. peers as a U.S. government shutdown entered a third day, Spanish and Greek bonds outperformed .
Spain's 10-year bond yield fell as much as 5 basis points to 1.39 percent, its lowest level in six weeks, before pulling back to trade steady at around 1.43 percent.
The premium investors demand for holding Spanish bonds over top-rated German government debt fell to around 89 bps, its lowest since March 2015.
Short-dated Greek bond yields were down almost 8 bps at 1.31 percent. Five-year Greek bond yields were slightly lower at 2.81 percent; longer-dated bond yields were a touch higher.
Greek yields have fallen sharply in recent weeks on expectations that Greece will exit its bailout programme this year and analysts said this was likely to remain the key driver of Greek debt.
"It's about how Greece manages the exit for the bailout programme, and if there's any tentative funding scheme still in place or anything that leaves the door open for Greece to receive European help, that would be much appreciated by the market," said Peter Schaffrik, head of European rates strategy at RBC.
Sentiment towards peripheral bonds was also supported by hopes for a deal to create a coalition government in Germany, the euro zone's biggest economy.
German Chancellor Angela Merkel's conservatives are preparing for formal coalition talks on Monday, wasting no time after the Social Democrats voted to go ahead with the talks following months of political deadlock.
With the European Central Bank meeting this Thursday, analysts said investors were also probably moving to the sidelines.
(Reporting by Dhara Ranasinghe, additional reporting by Fanny Potkin and Abhinav Ramnarayan, editing by Larry King)