Italy\'s borrowing costs plunged in an auction of six-month bonds following government plans to cut the deficit and boost growth, with a second crucial sale of longer-term debt set for Thursday.
Italy raised 9.0 billion euros ($11.8 billion) at a rate of 3.251 percent -- with some analysts suggesting that European banks making use of low-cost European Central Bank money were largely behind the auction\'s success.
The rate was half the 6.504 percent that Italy was forced to pay in November and also below the level of 3.535 percent it paid in October.
Italy also raised 1.733 billion euros with zero coupon bonds due in 2013 at a rate of 4.853 percent, compared to 7.814 percent last month.
On Thursday, Italy aims to sell between 5.0 billion and 8.0 billion euros in bonds maturing in three, seven and 10 years in a closely-watched auction.
This week\'s bond sales were being seen as a bellwether for market sentiment on Italy -- the eurozone\'s third largest economy -- but also for the euro area as a whole at the end of a year that has questioned the future of the euro.
Borrowing costs have spiked to record highs across the 17-nation eurozone in the past few months over fears that economies like Italy could be forced to seek giant international bailouts in the wake of Greece, Ireland and Portugal.
European leaders have agreed to strengthen rules and sanctions for keeping public accounts in order but there are lingering doubts about the deal and about the impact from an expected slowdown in eurozone growth in 2012.
Investors initially hailed Wednesday\'s bond auction, with stocks rising around Europe including a 1.24-percent jump in Milan but the enthusiasm petered out and Italian stocks were down 0.88 percent towards the end of trading.
Italy has spooked international markets this year with its slow growth and a sharp rise on its borrowing costs raising fears of an imminent blow-up of its giant debt -- equivalent to 120 percent of gross domestic product (GDP).
Silvio Berlusconi\'s replacement by Mario Monti as prime minister in November has helped calm nerves although there is still concern about the impact on the economy of a draconian plan of tax increases and pensions adopted this month.
The rate on 10-year bonds has hit well above 7.0 percent this year -- far higher than a level seen as sustainable -- and the European Central Bank has been forced to intervene with massive bond purchases on the secondary market.
Analysts suggested the ECB may also have had a role in Wednesday\'s dramatic drop in Italian bond rates as last week it provided banks with a record 489.2 billion euros in three-year loans at an interest rate of just 1.0 percent.
While the injection was made in order to avoid a credit crunch, the low rate makes it easy for lenders to make money off higher-yielding bonds, and analysts have been anticipating that the funds may help bring down government borrowing costs.
The sale was "a sign that market tensions have considerably eased from a month ago and that European Central Bank liquidity may be working to support demand," said Luca Cazzulani, a strategist at Italian banking giant UniCredit.
Gregorio De Felice, chief economist at Intesa Sanpaolo bank, was quoted by La Repubblica daily, as saying: "The success was determined, especially on the institutional investor front, by the European Central Bank auction."
De Felice said Italy was "not yet" on its way out of the crisis, indicating that demand on the two-year zero coupon bonds was not strong indicating that "investors still need to gain some confidence on the long term."
"It will be fundamental to see how the auctions of five and 10-year bonds go tomorrow. The month of truth will be January when there will be auctions for 53 billion euros," he said.
In 2012, Italy will have to raise 450 billion euros, the Corriere della Sera daily reported. The target is seen as challenging but possible by analysts.
The government has said it is planning a raft of measures to help stimulate the economy starting next year -- including a liberalisation of notoriously protectionist professional associations like taxi drivers and pharmacists.
Monti is also planning an overhaul of labour market legislation to make it easier to fire people -- a move that opponents say will sharply increase the unemployment rate but supporters say will actually help encourage hiring.
The government is forecasting the economy will contract 0.4 percent in 2012.
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