Analysts warned market tensions could easily reignite and pointed to a new test on Thursday when Italy will sell up to 8.5 billion euros of longer-term bonds, including three- and ten-year paper.

But the average rate of 3.25 percent at which Italy sold 9 billion euros of six-month BOT bills was down from a euro lifetime record of 6.50 percent just a month earlier.

"Many things have changed from a month ago: the government has won a confidence vote on its austerity package and the ECB has acted to help banks," an Italian bill trader said.

"This doesn't mean we can rule out further problematic auctions. Markets are easily unnerved."

Demand for bills totalled 1.69 times the amount on offer, a clear improvement versus a bid-to-cover ratio of around 1.5 at the end of November.

This is the first Italian debt sale since the ECB provided 490 billion euros in cheap three-year loans to euro zone banks on December 21 in an unprecedented move aimed at easing credit strains.

Expectations of a strong take-up at the ECB's tender contributed to an equally dramatic fall in Spanish short-term borrowing costs this month.

Madrid's six-month debt costs more than halved to 2.4 percent at an auction on the eve of the ECB's tender.

However, doubts about how much of the cheap three-year funds would find their way into troubled government bonds weighed on Italian and Spanish yields in the following sessions.

Italy's ten-year yields briefly climbed back above 7 percent this week, pushing the premium over the equivalent German benchmark above 500 basis points.

The yield stood at 6.8 percent, giving a premium of 489 basis points over Germany.

Credit Agricole strategist Peter Chatwell said the results bode well for the auction of three-year bonds on Thursday but he was less sure about the 10-year sale - typically a better measure of underlying interest from external investors.

"Demand for short term paper is good. It remains to be seen whether this extends to the longer maturities," he said.

Italy paid a euro lifetime record high yield of 7.56 percent to sell ten-year bonds at the end of November.