UPDATE 2-Italy gets vote of confidence from Fitch

* Italy's debt sustainable if it adheres to fiscal targets

* Rise in yields due to European response to crisis

* Italian yields fall after Fitch's comments

(Adds details from Fitch statement, market reaction)

By Walter Brandimarte

NEW YORK, July 13 (Reuters) - Italy received a vote of confidence on Wednesday as Fitch Ratings said the country's debt will likely remain on a sustainable path as long as the government adheres to its "ambitious" fiscal targets.

The ratings agency affirmed Italy's AA-minus credit rating with a stable outlook, saying it expects the government to succeed in reducing the budget deficit as expected.

It also said the recent austerity measures announced "strengthen the credibility of the goal of a balanced budget by 2014." In the absence of negative shocks, it added, the country should be able to stabilize its rating at the current level.

Fitch made the comments as markets grow increasingly worried Italy may be forced to request external financing, joining the ranks of Greece, Ireland and Portugal.

Those concerns drove Italian bond yields to their highest levels in more than a decade earlier this week. After Fitch's comments, yields on 10-year Italian bonds IT10Y10=RR erased gains and fell to 5.576 percent from Tuesday's close of 5.59 percent.

"The sharp rise in Italian and other euro zone government bond yields in recent weeks reflect a crisis of market confidence in the European policy response to the euro zone debt crisis, rather than deteriorating sovereign credit fundamentals," David Riley, Fitch's head of global sovereign ratings, said in a statement.

The agency said that, if yields on 10-year Italian bonds were to reach and stay at 7 percent, the country's interest payments would rise to 110 billion euros by 2015, or 6.1 percent of its gross domestic product, from an estimated 75 billion euros in 2011, which equals 4.8 percent of GDP.

"Even such an elevated cost of borrowing would not prevent a gradual reduction in the public debt-to-GDP ratio over the period, albeit at a much slower pace than envisaged," Fitch said, stressing that such a scenario depends on Italy's adherence to its fiscal targets.

Italy's cabinet on June 30 approved an austerity package worth 47 billion euros aimed at shielding the country from the Greek debt crisis and eliminating the budget deficit in 2014. (Editing by Chizu Nomiyama and Andrew Hay)