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UPDATE 1-Italy's bond yields fall, market welcomes 50-year bond sale

Dhara Ranasinghe

* Italy to sell more 50-year bonds

* Analysts say tap may come as early as Tuesday

* Broader euro zone bond markets largely steady

* Euro zone periphery govt bond yields http://tmsnrt.rs/2ii2Bqr (Adds details on Italy bond sale)

LONDON, July 9 (Reuters) - Italian bond yields fell on Tuesday, outperforming other euro zone fixed income markets as investors welcomed the sale of more ultra-long Italian bonds at a time when assets with positive yields are increasingly hard to come by.

Italy began the sale of a new tranche of its 50-year bond launched in 2016, taking advantage of improved market sentiment after Rome avoided EU disciplinary action over its fiscal position last week.

Demand for the bonds topped 14 billion euros, according to International Financing Review.

Italy's 50-year bond yield was steady at 2.88%, having initially jumped on Monday after Italy unexpectedly announced its intention to tap the ultra-long dated bond.

"The announcement perfectly encapsulates the yield grab that has been galvanised by the recent dovish shift on the part of the Fed and the ECB," said Richard McGuire, head of rates strategy at Rabobank in London.

"With the decision to tap the 50-year reflective of investor appetite for both risk and duration."

Italian yields dipped 2-3 basis points across the curve, while most other euro zone bond yields edged higher.

The backdrop for the bond sale could not be more favourable.

Italian bond prices surged last week, not only because Rome avoided EU sanctions over its fiscal policies but also on expectations that the European Central Bank would retain its dovish stance under incoming president Christine Lagarde.

With more than half the euro zone bond market offering yields in negative territory, demand for bonds with a positive yield is strong.

Tuesday's sale is the second syndicated deal for Italy in less than a month, after Rome sold 6 billion euros ($6.7 billion) of a new 20-year government bond in June.

"And the demand for yield is still strong, so tapping the 50-year bond gives investors duration and credit -- two things they are looking for," said DZ Bank rates strategist Christian Lenk.

Data on Monday showed Japanese investors were net sellers of French bonds in May for the second consecutive month but increased their purchases of Spanish debt.

Analysts say that trend may have accelerated given that even long-dated French government bond yields have fallen into negative territory in recent weeks.

Outside Italy, most euro zone bond yields rose as profit-taking on recent price gains set in as investors dialled back expectations for aggressive U.S. rate cuts this month following Friday's strong jobs data.

Closely-watched bond spreads over euro zone benchmark issuer Germany have widened slightly as a result. The Spanish/German 10-year bond yield gap briefly hit 81 bps -- its widest since mid-June.

(Reporting by Dhara Ranasinghe; Editing by Catherine Evans and Ed Osmond)