Italian bond markets greet Renzi with lower yields
* Italian yields dip towards eight-year lows
* Renzi forces Letta to resign as Italy's prime minister
* Markets view Renzi as "positive" change
By Marius Zaharia and Joshua Franklin
LONDON, Feb 14 (Reuters) - Italian bond yields edged back towards eight-year lows on Friday as investors warmed to the prospect of centre-left leader Matteo Renzi taking over as prime minister from low-key party rival Enrico Letta, with a pledge for more "ambitious" government.
Letta plans to tender his resignation to President Giorgio Napolitano on Friday after his Democratic Party supported Renzi's call for a new government. Napolitano is then expected to call on Renzi to form a new administration.
Renzi has criticised Letta for failing to introduce growth-boosting reforms as Italy has lagged an economic rebound in peripheral euro zone peers.
Data showed on Friday Italy's economy grew 0.1 percent in the fourth quarter, compared with 0.3 percent growth in the euro zone as a whole and 0.5 percent in Portugal.
Improving its growth prospects is key for Italy's attempts to curb a 2 trillion euro debt load, which is roughly 1.3 times its economic output.
Investors seemed to take the news well, with 10-year Italian yields falling 2 basis points to 3.70 percent, just 4 basis points shy of an eight-year low hit earlier this week. They traded around 3.78 percent before Renzi proposed the leadership change to his party late on Thursday.
"The appointment of Renzi is seen as something positive. He is a new politician who can take decisive action," said Patrick Jacq, rate strategist at BNP Paribas in Paris.
"He looks like he has a stronger support from the majority and he is more able to conduct structural reforms ... This is not political uncertainty. In fact, the political situation in Italy now is clearer."
Other analysts said Renzi's stronger hand risked turning his coalition partners against him in the longer run.
"I think there is a big risk actually this whole thing could actually blow up in a way that, at the moment, is not seen by the market," said Gianluca Ziglio, an analyst at Sunrise Brokers in London. "If Mr. Letta was not successful and he is someone who is a bridge between the two sides, someone who is going to be more on one side might find it even harder."
German 10-year Bund yields, the euro zone's benchmark, were up slightly at 1.68 percent.
Renzi is due to lead Italy's third administration in a year and his coalition partner, the New Centre Right Party, said it did not expect him to last a full term until 2018.
The unstable political backdrop has been one of the factors to blame for Italian yields trading above their Spanish peers.
Spanish Prime Minister Mariano Rajoy has survived a corruption scandal in his party and has been able to push through reforms that have improved economic indicators beyond market expectations. But for some, Renzi brings renewed hope.
"Based on what's gone on in the past, you have to question whether this will be sustainable also," ICAP strategist Philip Tyson said. "But I think the market's viewing it from the point of view that, of anybody available at the moment, he offers the most potential."
Moody's Investor Service is due to review Italy's credit rating on Friday, in accordance with new European regulations obliging ratings agencies to publish a calendar of when they might adjust their views on sovereigns.
Analysts do no expect any change in Italy's ratings or outlook and the agency may not make any announcement if it decides to maintain the status quo.
Moody's rates Italy Baa2, while Standard & Poor's ranks it BBB and Fitch has it on BBB+, all with a negative outlook and citing political fragility as weighing on its ratings.
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