Spain yields dip at sale of short-term debt

* Spain sells 2.1 bln euros in 3-, 6-mth T-bills

* Yields fall about 20 basis points compared with February

* Treasury shows no problem in selling short-term debt

By Nigel Davies

MADRID, March 22 (Reuters) - Spain paid less to borrow over the short-term on Tuesday than it did a month ago and demand from investors was strong as they favour the country over weaker neighbour Portugal before key European meetings this week.

The Treasury sold 1.2 billion euros ($1.7 billion) of three-month treasury bills at a regular tender, and 842 million euros of six-month paper, in the middle of its 1.5-2.5 billion euro target.

The issues drew over 11 billion euros worth of bids, showing strong demand for the country's short-term debt, following successful long-term bond sales last week.

The average yield on the three-month bill was 0.899 percent, down from 1.101 percent at the last auction on Feb. 22, and 1.361 percent, compared with 1.588 percent last time out on the six-month issue.

"Yields fell by more than I expected, I had expected them to fall by around 10 basis points," said Chiara Cremonesi, strategist at UniCredit, who said both short-term and longer dated Spanish debt was in demand.

"The difference between Portugal and Spain has been clear for a while. Investors are asking themselves when Portugal will ask for help."

Market sentiment has improved towards Spain following government steps to overhaul the banking sector and cut its deficit.

In a sign of renewed international confidence, Russia said on Monday it had readmitted Spain to the list of countries in which its National Welfare Fund can be invested, after excluding it at the height of the euro zone debt crisis last autumn. [ID:nLDE72K1A2]

A surprise European Union deal to boost the permanent rescue fund for struggling countries has also helped sentiment. European Union ministers meet later this week to hammer out the final details.

However, yields were still high historically. Last March the treasury paid 0.334 percent and 0.490 percent for its three and six month paper respectively.

The premium investors demand to hold key Spanish ten-year debt compared with benchmark German bunds was 189 basis points on Tuesday, more than twice the 427 bps spread for Portuguese debt which is seen as unsustainable and likely to force Lisbon to follow Greece and Ireland in seeking an international bailout.

Demand was strong for both issues, with the three month bill covered 4.3 times, and the six-month paper 7.7 times, compared with 3.3 and 5.5 at February's auctions. Both were boosted by a lower target range compared with the 2.5-3.5 billion euros in February.

(Reporting by Nigel Davies; editing by Patrick Graham)