* Spain sells at top end of target, peripherals benefit
* Spanish issuance skewed towards 10-year sector
* Bund in tight ranges as investors brace for ECB
By Ana Nicolaci da Costa
LONDON, March 7 (Reuters) - Spanish bond yields fell on Thursday after a strong auction boosted demand for riskier peripheral assets, but German Bunds stuck to tight ranges as investors braced for the European Central Bank's rate decision.
Spain sold 5 billion euros of three bonds at auction on Thursday - at the top of end of the target range - attracting higher bids across maturities as investors continued to rely on the promise of an ECB bond-buying programme.
Madrid also skewed issuance towards 10-year debt in a sign investors are confident enough to load up on longer-dated Spanish paper even as it falls outside the scope of possible ECB support and even as Italy struggles with political uncertainty.
"It's confirmation that Spanish bonds are reacting quite well, especially in the aftermath of the Italian elections," Alessandro Giansanti, strategist at ING said.
Ten-year Spanish government bond yields fell 7.1 basis points on the day to 4.96 percent.
Average borrowing costs at the auction fell and the bid-to-cover ratios rose across the board, more than doubling in the case of the 2015 bond to 4.9 from 2.0 at a similar sale in January.
The successful result comes even as Italy faces a political stalemate after an inconclusive election, which some fear could rekindle instability in the euro zone.
Ten-year Italian yields were 4.1 bps lower at 4.63 percent, as bond prices rose for a third consecutive day. But they remained well off two-year lows hit at the end of January at 4.075 percent - a sign of lingering political worries.
Sanjay Joshi, head of fixed income at London Capital Asset Management, which manages $1.5 billion in fixed income assets, said the fund had dipped back into Italian debt markets after a sharp post-election sell-off made them cheaper and attractive.
But over a six-month horizon they were still underweight peripheral sovereigns on the view that the political situation in Italy remains fluid.
"Clearly the OMT (Outright Monetary Transactions) threat remains in the background, that might continue to protect Italy and Spain but the volatility is extreme," Joshi said.
"From a strategic perspective on peripheral sovereigns, we are still remaining underweight i.e. zero exposure."
Standard & Poor's revision of its outlook on Portugal's BB sovereign ratings to stable from negative also helped sentiment towards lower-rated euro zone bonds.
Ten-year Portuguese bond yields fell 15 bps to 6.06 percent.
German Bund futures stuck to tight ranges, with investors reluctant to put on big bets before the European Central Bank's monetary policy decision followed by a news conference.
Bund futures were up 8 ticks on the day at 145.20, after a choppy start to the day, and analysts said there was further upside potential if ECB President Mario Draghi is more downbeat on the euro zone's prospects than expected.
The ECB is seen holding rates at a record low 0.75 percent and abstaining from any specific action to help Italy.
"I still think that Bunds will benefit from a slightly - not dovish Draghi, but one that will exacerbate the negatives ... by expressing his concerns about growth in the euro area," Michael Hewson, senior market analyst at CMC Markets said.
Draghi is also expected to say there is no question of loosening the central bank's rules on bond buying to accommodate Italy, according to analysts.
The March Bund contract rolls over into the June contract this session and the latter was up 12 ticks on the day at 143.37.