REFILE-EURO DEBT SUPPLY-ECB support level critical for Italy, Spain sales

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* Italian, Spanish bond auctions seen going well

* But scale of ECB support critical to sentiment

* France brings first non-German triple-A issues in a month

By Kirsten Donovan

LONDON, Aug 26 (Reuters) - Debt auctions by Italy and Spain next week are likely to look good on paper but markets will carefully scrutinise how much it cost the European Central Bank to support the sales.

The ECB has knocked yields on both countries' debt down to around 5 percent by buying 36 billion euros of peripheral euro zone debt in the two weeks to Aug. 16, with purchases concentrated on Italian and Spanish paper, traders said.

The central bank's support means Spain and Italy, issuing bonds for the first time since the ECB began buying, are likely to get the money they need at lower yields than at recent auctions.

However, that will do little to reassure investors who saw yields soar a few weeks ago as the sovereign debt crisis intensified and who must start buying if Italy is to meet its future funding needs.

" No one is going to start buying the periphery on the back of a good auction," a London-based bond trader said.

"But if you have a bad auction that may be a signal for the market to question if the ECB are doing their job and are committed enough. All the risks around this supply are to the downside."

Although the ECB cannot buy paper in the primary market it can provide support by buying in the secondary market both in the run-up to the sales and afterwards.

"Anything above 20 to 25 billion euros a week (in purchases) would probably raise a few eyebrows," said WestLB rate strategist Michael Leister.

"If the figures are too low you question the ECB's commitment but if they're too high it's going to be an issue of sustainability."

Italy will issue up to 3.75 billion euros of new 10-year bonds with a 5 percent coupon on Tuesday along with up to 3.25 billion euros of three-year bonds and 1 billion euros of floating-rate notes .

"Italy faces a lot of refinancing in September and the ECB measures have reduced the funding costs but the question is 'do private investors step up to the plate?' and the jury is still out on that," said Nick Stamenkovic, rate strategist at RIA Capital Markets.

ECB buying has brought yields on Italy's and Spain's 10-year bonds down around 150 basis points -- although they have crept back above 5 percent in recent days.

"The ECB intervention has clearly distorted the market but price action suggests investors are starting to demand some sort of concession ahead of the auction," said RIA's Stamenkovic.

"Even with the ECB buying, 10-year yields are back above 5 percent which suggests supply is coming to the forefront of investors' minds and it is a key test of sentiment."

But one good auction will not be enough as Italy must make around 50 billion euros of coupon and redemption payments in September, according to Reuters data, although the roughly 22.5 billion euros due to be repaid to investors next week should help support Tuesday's sale.

"It will be crucial for Italy to avoid any failure in their forthcoming auctions," said ING rate strategist Alessandro Giansanti, adding the country was too big to be bailed out by the euro zone's rescue fund.

"We expect, at least, the domestic investors to roll over their exposure."

Yields fell and bid/cover ratios increased at sales of Italian bills and zero-coupon bonds on Friday .

Spain follows on Thursday with the sale of a new five-year bond. Unusually for a new Spanish issue the bond will be sold at auction rather than via syndication.

"There'll be demand, of course, but whether the level marks a real representation of the market demand, I couldn't say," a Madrid-based trader said.

"The yield will be around 4.30 percent and you've really got not much to lose. With the ECB there, this level will be stable. You're not running the risk the yield will suddenly jump."

Spain has around 17 billion euros of coupon and redemption payments looming in October.

Analysts point to levels of 5-year Italian and Spanish credit default swaps as one indicator of sentiment untainted by the ECB's support. Those levels are still near record highs.

France wraps up the week's supply with the auction of 6.5-8 billion euros of fixed-rate five-, 10- and 30-year bonds -- the first non-German triple-A rated paper to be sold since late July. (Additional reporting by Paul Day in Madrid, editing by Nigel Stephenson)