ECB buying to help Italy 10-yr yield dip at auction

* Italy sells 6-8 bln euros of 3-, 7- and 10-year debt

* Yields seen falling from end-July due to ECB support

* 10-year yield seen at around 5.20 pct from 5.77 pct

By Valentina Za

MILAN, Aug 30 (Reuters) - Italy's borrowing costs are set to fall at a debt sale on Tuesday with its benchmark 10-year yield seen at around 5.20 percent thanks to support from the European Central Bank, after hitting an 11-year high in July.

The ECB started buying Italian and Spanish government bonds on the secondary market on Aug. 8 to ringfence the euro zone's third- and fourth-largest economies from a spreading debt crisis in the bloc.

Italy paid 5.77 percent to sell 10-year paper at the end of July, the highest in 11 years and up more than 80 basis points from a month earlier.

Investors' worries about Italy's ability to repay its 1.9 trillion euro debt further pushed the 10-year yield to around 6.4 percent on the secondary market in early August before the ECB stepped in, pushing yields back towards the 5 percent level.

Italy cancelled a mid-August long-term bond sale, so Tuesday's BTP auction is the first since the ECB began buying Italian bonds.

"Confidence is high right now that the ECB is committed to supporting the market at a time when liquidity is still low," said Francesco Leghissa, an analyst at Italian asset manager Copernico SIM.

Luca Cazzulani, a strategist at UniCredit in Milan, said demand for Italy's relatively modest offer of between 6 billion and 8 billion euros in three-, seven- and 10-year debt would also draw support from around 18 billion euros in redemptions.

"Even a very conservative reinvestment rate of 50 percent would point to sufficient demand to cover the sale," he said.

Italy is selling up to 3.75 billion euros of a new 10-year BTP bond maturing in March 2022, together with new tranches of a July 2014 BTP and a Euribor-linked CCTeu bond.

The current 10-year benchmark yielded around 5.10 percent on Monday but new bonds are normally issued at a premium.

Analysts saw the auction yield on the July 2014 BTP in line with Monday's market level of just below 4 percent, down from 4.8 percent at a sale at the end of July.

Italy met strong demand and yields fell on Friday when it sold 10.5 billion euros of short-term debt .

The ECB said on Monday it had more than halved its bond purchases to 6.7 billion euros last week. The central bank had bought a record 22 billion euros in the week to Aug. 12, when it intervened in the bond market after 19 weeks of inactivity.

Continued support from the central bank remains crucial to prop up investors' confidence in the short-term, analysts and traders said, amid uncertainties over a second bailout package for Greece.

Adding to markets' jitters, Italy is struggling to agree changes to a 45.5 billion euro austerity package the government hastily approved this month in return for the ECB's help and which is making its way through parliament.

"Italy needs to convince the market it can make it without help from the ECB," Cazzulani said.