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MILAN, Dec 29 (Reuters) - Italian borrowing costs fell at the final bond auction of the year on Thursday in a sign of resilient investor appetite for the country's debt as the government prepares to rescue ailing bank Monte dei Paschi di Siena and other weak lenders.
Italy sold 6.75 billion euros ($7 billion) of debt over four bonds, at the top of its planned range for the issue.
Borrowing costs had risen sharply at the last auction in late November as investors fretted about looming political instability in the wake of a Dec. 4 referendum on constitutional reform. Prime Minister Matteo Renzi resigned after the vote.
Concerns have receded as the transition towards the new government led by Renzi's loyalist Paolo Gentiloni has been relatively quick and smooth. Gentiloni has also announced measures to bolster the country's vulnerable banking sector, including a 20 billion euro state fund, addressing another source of investors' worry.
But doubts remain over whether the banking fund will be sufficient and over the exposure to bad loans of Italian banks, which hold a high proportion of government debt.
Italy has taken longer than other European countries to stabilise its banks, still saddled with 360 billion euros in impaired assets, about a third of the euro zone's total.
Italy's benchmark 10-year debt costs fell to 1.77 percent on Thursday compared to 1.97 percent at a late November sale. Demand totalled nearly 1.42 times the amount sold compared with a bid-to-cover of nearly 1.6 times at the previous one.
Italy also sold a five-year bond paying 0.54 percent, down from 0.91 percent when it last sold the bond on Nov. 29, alongside CCTeu notes and an off-the-run Nov. 2026 bond.
$1 = 0.9567 euros Reporting by Giulia Segreti; Editing by Elaine Hardcastle