Italy paid sharply lower rates at a bond auction yesterday when it raised €12 billion in two batches for three months and one year, the Bank of Italy said.

The rate for the one-year bonds plunged to 1.405 per cent from 2.230 per cent at the time of the last such issue on February 13, and the rate on the three-months bonds dropped to 0.492 per cent from 1.907 per cent on September 12.

Investors put up a total of €19.5 billion for the €12 billion worth of debt on offer.

The outcome sent a signal that investors have new-found confidence in Italy which at the end of last year had been seen at risk of being potentially the next eurozone country to fall into a debt crisis.

Italy, which returns to the market today with a medium-term bond issue, has benefited from a sharp drop of yields on its traded bonds since the beginning of the year. The yield, or interest rate, on its benchmark 10-year bonds is about five per cent, down from about seven per cent at the end of 2011.

Bond yields of much above six per cent are widely considered to render the debt of eurozone countries unsustainable.

New Italian Prime Minister Mario Monti imposed tough austerity measures to fix the public finances and his government has also launched a vast programme to reform and open up the economy which is going through parliament.

He is also discussing restructuring measures, including a major reform of rules covering the labour market, with trades unions and employers.

Analysts said the borrowing rates paid by Italy had also been pushed down by massive injections of money into the eurozone system by the European Central Bank under two refinancing operations making available loans for three years to commercial banks.