* Italy daily repo volumes at highest since 2006
* Negative rates in German, French repo boon for Italy
* Stabler peripheral markets also helping Spain repo
By Emelia Sithole-Matarise
LONDON, Feb 18 (Reuters) - Daily volumes in short-term borrowing using Italian government bonds is at its highest since before the financial crisis, reflecting recovery in parts of euro zone money markets.
According to data from repo index provider RepoFunds, volumes in the Italian repo market reached 69 billion euros on Friday, the highest since 2006 -- before the start of the global financial crisis the following year.
The RepoFunds index was launched in December by interdealer brokers ICAP and electronic trading platform MTS, and is based on electronically-executed repo trades that use a bond, bill or floating rate note issued by the relevant sovereign.
Activity in the Italian market has picked up since the European Central Bank unveiled its yet to be tested bond buying scheme last September and lifted investor confidence that the region can contain its three-year-old debt crisis.
The Italian repo market is also benefiting from investors looking for a return on their cash as it offers some return compared with near to below zero rates in the German or French repo markets, analysts said.
Chris Clark, an analyst with ICAP, said Italian bonds had been popular as collateral since the ECB outlined its bond purchase programme in September.
"Lending out short-dated cash against Italian collateral has been benefiting a good deal from German and French rates being negative...You can get a bit of interest rate and it's a very mature and liquid government bond market so you can move in and out of your positions easily," he said.
The RepoFunds rate on Italian bonds was at 0.010 percent at Friday's fixing, compared with -0.026 percent for German bonds and -0.013 percent for France.
The cost of borrowing using French and German government bonds has been driven back below zero since data last week showed the euro zone economy slipped deeper than expected into recession in the fourth quarter, reviving speculation the ECB would cut its deposit rate.
Money markets had all but priced out a cut in the rate the ECB charges banks to deposit cash at its overnight facility to negative territory but its vice-president, Vitor Constancio, said on Thursday such a move was "a possibility" though no decision had been taken.
The hunt for yield has also seen activity in the Spanish repo market pick up, according to traders, though figures on volumes were not readily available.
Reduced fears of a euro zone break-up has also seen Spanish bond yields tumble from unsustainable levels, enabling the country to keep funding itself.
"We're not seeing trading in long-term but in short-term where foreign counterparties are interested again and are opening lines to trade Spanish and Italian repo. It's easier to sell Spanish paper in the repo market than before," one money repo trader said.