(Updates with analyst comments, context)
By Dhara Ranasinghe
LONDON, Sept 30 (Reuters) - Portugal's 10-year bond yield was set on Friday to end September with its biggest monthly rise since June last year, reflecting growing concerns about the country's ratings outlook.
Jittery markets are counting down to a review on Oct. 21 by DBRS, the last major ratings agency to give Portugal the investment grade rating it needs to qualify for the European Central Bank's bond-buying programme.
The ECB'S 1.7-trillion-euro asset-purchase programme has helped keep borrowing costs low, underpinning bond markets at times of volatility such as in the wake of Britain's vote in June to leave the European Union.
Last month, DBRS warned that pressures were building on Portugal's creditworthiness, stoking concern about the ratings outlook.
"We're still in the camp that DBRS is not going to downgrade Portugal, although it could change the outlook which effectively means Portugal loses the investment grade status further out," said ING senior rates strategist Martin Van Vliet.
"Concerns about this have been behind the underperformance of Portuguese bonds."
Portugal's 10-year government bond yield was up 1 basis points at 3.33 percent on Friday, while Spanish and Italian bond yields fell in step with other euro zone peers.
It has risen almost 27 basis points this month, setting it up for the biggest monthly rise since June 2015, according to Tradeweb data.
A lacklustre economic performance, weak banking sector and a coalition government at odds with the European Commission over the budget deficit have also soured sentiment towards Portugal.
The gap between 10-year Portuguese bond yields and top-rated German bonds rose to around 357 bps earlier this week, its widest since February, when concerns about the health of Europe's banking sector rattled markets.
With risk aversion and a flight-to-safety into core euro zone bonds in play again this week on worries about Deutsche Bank, Portuguese bonds have also suffered from a general fall in investor appetite for risk assets.
"In a scenario where Portugal risks losing market access (e.g. because it falls out of quantitative easing) or in a situation of generalised risk aversion, we believe PGBs (Portuguese government bonds)have substantial room to sell off," UBS said in a note published earlier this week. (Reporting by Dhara Ranasinghe; Editing by Mark Heinrich)