* Spain to sell 3.5-4.5 bln euros in debt
* Yields expected to fall slightly from previous auctions
* Demand seen high as banks flush with new ECB funds
* Results expected around 0940 GMT
By Nigel Davies
MADRID, March 1 (Reuters) - Spain is likely to pay less to borrow at a triple bond auction later on Thursday as the European Central Bank's latest huge injection of liquidity powers demand for its debt from banks.
The Treasury aims to raise 3.5 billion euros to 4.5 billion euros ($4.70 billion-$6.04 billion) via an auction of bonds maturing in 2014, 2015 and 2016. The sales will take total borrowing in the first months of the year to almost 40 percent of the Treasury's target for the whole of 2012.
Spain has made significant progress with its issuance plans thanks largely to the ECB's first auction of cheap three-year funds to banks in December, which increased appetite for high-yielding debt issued by euro zone periphery countries.
Wednesday's even larger sale of 530 billion euros of similar funds is expected to offer further support for Spain's debt sales in coming weeks. France will also return to debt markets on Thursday when it aims to sell up to 8 billion euros of bonds.
The ECB auctions have helped put ease Madrid's financing position although analysts warn appetite for its debt could wane later in the year given the government's struggles to cut the public deficit as the economy slips deeper into recession.
"In light of the ECB auction and recent bond auction history, it would not be surprising if Spain issued well above the target range," said Peter Goves, strategist at Citi, who said domestic banks were likely to support Thursday's sale.
In January the Treasury managed to sell around double its targeted amount at auctions as demand leaped on the ECB cash.
Goves said economic fundamentals would determine the outlook for sovereign bonds later in the year depending on how successfully countries are able to tackle their deficits.
The Treasury can expect to pay slightly reduced financing costs across all of its bonds from previous auctions, analysts said, predicting they would come roughly in line with secondary trading market levels or perhaps slightly higher.
At current levels the 2014 bond, last sold in October, would pay an average yield of around 2.33 percent.
The 2015 bond would have a yield around 2.92 percent, down from 3.332 percent when it was last sold on Feb. 16, while the 2016 bond would yield around 3.35 percent, some 10 basis points lower than when it was last auctioned on Feb. 2.
Spanish banks are expected to have filled their coffers at the ECB's latest financing operation. On Tuesday, the co-chairman of smaller Banca Civica said it had taken up 6.1 billion euros, which it would use to buy more sovereign debt and to increase lending.
Spanish banks increased their holdings of securities issued by euro zone governments by a record 23.1 billion euros, bringing the total they held in January to 229.6 billion euros, ECB data showed.
Spain's debt costs have largely fallen at auctions this year, helped by the ECB's liquidity actions as well as government commitments to slash the deficit and impose structural reforms needed to improve the country's competitiveness.
However, the Treasury has focused on selling debt maturing around the five-year mark or lower, and analysts wonder if the country's longer-term debt would be so readily snapped up by international investors.
On Tuesday a senior director at the Spanish Treasury said he expected demand to carry on being strong, but not to the same extent as witnessed at the start of the year.
Spain's fortunes have mirrored those of Italy, which sold 10-year debt on Tuesday at the lowest level since August. ($1 = 0.7450 euros) (Additional reporting by Jesus Aguado; Editing by Catherine Evans)