* Spain issues 2.5 billion of bonds at higher price
* France sells 7.4 billion of long-term bonds
* Take-up suggests continued demand from Spanish banks
MADRID/PARIS, May 3 (Reuters) - I nvestors kept up their a ppetite for Spanish and French government de bt at auctions on Thursday though em battled Sp ain was forced to pay a much higher price than in previous sales.
France's 10-year borrowing costs stayed relatively stable at the country's last debt auction before a presidential election on Sunday while Spain met strong demand in its first auction after Stan dard and Poor's cut the country's cre dit rating by two notches to BBB+ last week.
Both sales were important tests of investor nerves after S pain surged b ack t o the forefront of the euro zone debt crisis due to concern over its public deficit, recession-hit eco nomy an d ailing banks.
A source from Spain's Economy Ministry said the strong demand for the three- and five-year Spanish paper was a mark of confidence in the country's economy.
"The demand has been evenly shared on the three bonds sold, which shows investors are still interested in the Spanish debt, especially in the longer maturities," the source said.
The Treasury issued 2.5 billion euros ($3.3 billion), at the top end of a relatively small targeted amount after it reached half of its the gross amount it had targeted for 2012 in the first four months of the year.
The yield on the longest bond, maturing in July 2017, rose close to 5 percent f rom 3.7 percent at a previous sale in 2005. I t was well below the 7 percent that is deemed unsustainably expensive over the long run.
Take-up rates were healthy, suggesting continued demand from the domestic banks that have underpinned recent debt sales.
Spanish bond yields fell after the auction but German Bunds briefly pared earlier losses - implying some safety seeking by investors - with some of the details in the results disappointing the market.
"With foreign investors becoming even more risk averse, it's the 'domestics' that are holding the fort," said Nicholas Spiro, from Spiro Sovereign Strategy.
"As is invariably the case with Spanish auctions, there were mitigating factors at work - particularly today's fairly modest volume... The rapid deterioration in sentiment towards Spain is showing up mostly in higher yields. Demand is still there for the time being."
LENDERS UNDER PRESSURE
In France, 10-year borrowing costs stayed relatively stable on Thursday at the country's last debt auction before a presidential election on Sunday that has kept some investors on the sidelines, concerned about a potential Socialist government.
France sold 7.4 billion euros of long-term OAT bonds, at the top of a planned issue range of between 6.5 billion and 7.5 billion euros, despite the political uncertainty.
France and Spain have strongly benefited from the European Central Bank pumping 1 trillion euros of liquidity into the banking system.
Spanish lenders, virtually cut out of wholesale debt markets after losing billions since a decade-long property bubble burst in 2008, snapped up the EC B cash and us ed a portion of it to buy up high-yielding sovereign debt, a ccording to recent dat a from the Bank of Spain.
According to the central bank, Spanish lenders held just over 13 percent of domestic debt in November 2011, but that total soared to almost 30 percent by March.
Non-residents held almost 56 percent of all Spanish debt in November, but by March, that proportion had fallen to 38.8 percent.
In Thursday's sale, Spain sold 979 million euros of a bond maturing July 30, 2015 at an average yield of 4.037 percent and a bid-to-cover ratio of 2.9, compared to a ratio of 2.4 at the last auction in March.
It also sold 764 million euros of a bond maturing January 31, 2017 at an average yield of 4.752 percent. The bond was 3.7 times subscribed, after 2.7 times at the last primary auction in February when the bond sold at an average yield of 3.565 percent.
It also sold 773 million euros of a bond maturing July 30, 2017, at a yield of 4.960 percent. It was 3.1 times subscribed.