* Italy-Germany bond yield spread tightens
* Key election looms this weekend
* Italy sells 7.711 bln euros of bonds in auction
* Euro zone periphery govt bond yields http://tmsnrt.rs/2ii2Bqr (Updates throughout)
LONDON, Feb 27 (Reuters) - Italian government debt outperformed euro zone peers on Tuesday as investors snapped up the country's last bonds to be auctioned before an election this weekend that is seen as too close - and complicated - to call.
Italy sold around 7.71 billion euros of debt, including 4 billion euros worth of a new March 2023 bond, towards the top end of a targeted range.
The supply was well-absorbed by markets, helping support Italian bonds and suggesting sentiment towards Italian assets ahead of the election remains firm.
"Given the risks we have ahead of the election and with bond yields turning up, the auction results saw fair demand," said Daniel Lenz, a rates strategist at DZ Bank.
Italy's 10-year bond yield was 0.5 basis points lower at 2.10 percent, while most other long-dated euro zone bond yields were 1-2 basis points higher on the day.
Commerzbank analyst Christoph Rieger said there were also technical reasons for Italy's outperformance: more than 9 billion euros of coupon repayments are due at the end of this week, primarily from Italian debt.
The gap between Italian and German bonds yields narrowed to 143 bps, its tightest in five days and below recent highs of 152 bps.
That spread has widened in recent weeks as the vote has got nearer, making Italian bonds more attractive to those investors who take a more sanguine view of political risk in the euro zone's third-largest economy.
Analysts said the market is looking beyond the election, expecting most of the tail risks to be averted.
Polls point to a hung parliament. But while they suggest the anti-establishment 5-Star Movement is by far the most popular party, a centre-right coalition led by Forza Italia and the League party looks the most likely outcome.
"(Italian center-right leader Silvio) Berlusconi has changed the game by taking away some of the people who were ready to go for 5-Star, which makes it harder for (5-Star leader) Beppe Grillo to have a majority," said Francois Savary, CIO at Swiss Wealth Manager Prime Partners.
Germany's 10-year bond yields rose 2 bps to 0.67 percent, shrugging off news that German inflation has slowed.
Regional data showed on Tuesday that inflation in six German states has slowed on the year in February.
But Bundesbank President Jens Weidmann said on Tuesday that rapid and broad-based economic growth will ensure that inflation continues to rise so the European Central Bank should gradually reduce its stimulus.
Later in the day, new Federal Reserve Chairman Jerome Powell is due to give his first congressional testimony -- seen as critical for markets at a time when many investors are nervous about the pace of Fed policy normalisation.
(Reporting by Fanny Potkin and Abhinav Ramnarayan; Additional reporting by Sujata Rao; editing by xxx)