* Tax deal offers Italian debt short-term respite
* Italian debt sale seen faring well, redemptions help
* Bunds slip as Western strike on Syria appears delayed
By Emelia Sithole-Matarise
LONDON, Aug 29 (Reuters) - Italian bond prices pushed higher on Thursday after the government agreed to scrap an unpopular property tax, averting for now a potential split within the country's ruling coalition.
The deal to replace the levy with a "service tax" offers some near-term respite for Italian debt, which had lagged Spain recently, smoothing the way for an auction in Rome of up to 6 billion euros of bonds later in the day, including new five-year paper.
The sale, which follows a lacklustre auction of zero-coupon paper on Tuesday, was expected to be supported by bond redemptions of up to 6 billion euros.
Italian bonds extended the previous day's outperformance of other euro zone bonds, including safe-haven German Bunds which were on the back foot as the threat of an imminent military strike on Syria by Western powers appeared to ebb.
"The political instability risk has receded a little bit and that's giving BTPs a bit of a bid again and the imminent action on Syria seems to have receded overnight so is also weighing a little bit on core markets," a trade said.
"Given the tone in the last 24 hours, the Italian auction should go fine."
Italian 10-year yields were last 2 basis points down at 4.38 percent with the Spanish equivalent 1 bps lower at 4.52 percent. Italian bonds have been clawing back some ground against their Spanish counterparts since Wednesday as the government looked close to meeting demands by the centre-right party of former premier Silvio Berlusconi to scrap the property tax.
The Spanish/Italian yield spread has widened to 14 bps, having neared parity on Tuesday with some strategists expecting it to expand further once Thursday's debt sale is done. Month-end related buying is seen favouring Italian debt as domestic investors return after the European summer break.
"The odds are for a spread reversal in the near term, with upcoming month-end index extensions being supportive for BTPs, domestic political risks abating and next week's Spanish government bond auctions moving into the market's focus," Commerzbank strategists said in a note.
"However, with additional policy risks looming large in September we see good reason to sideline our peripheral spread tightening view versus Bunds," they said, citing a potential escalation of the turmoil in Syria.
The Bund future was last 5 ticks lower at 140.25 with German 10-year yields 1 basis point up at 1.89 percent as riskier assets such as equities rose after the United States and Britain appeared to back off from an immediate military strike on Syria.