* Spain sells 5 billion euros of 5-, 10-, 30-year bonds
* Madrid completes a quarter of its 2014 funding plan
* Euro zone PMI below expectations, weigh on low-rated debt
By Marius Zaharia
LONDON, Feb 20 (Reuters) - Spanish bond yields bounced off eight-year lows on Thursday as another plump debt sale helped Madrid complete about a quarter of its 2014 debt programme just as uncertainty over the euro zone growth outlook resurfaced.
An expected acceleration in business activity within the currency union failed to materialise, with Markit's Composite Purchasing Manager' Index dipping in a sign the economic recovery remained fragile, particularly outside Germany.
Analysts said the data would not lead to a major shift in growth expectations, but it raised questions as to whether investors were perhaps too optimistic at the start of the year about how far economies would strengthen, helping governments manage their debts more easily.
Despite the figures being released during the bidding process, Spain secured strong demand at an auction of 5 billion euros of five-, 10- and 30-year bonds. The sum raised on Thursday takes Madrid's funding progress so far this year to a quarter of the 133.3 billion euro annual target.
It has capitalised on the upbeat sentiment towards the bloc's more vulnerable economies in the first few weeks of 2014 with more than two thirds of its issuance carrying maturities of 10 years or more.
That puts Madrid in a comfortable position even if economic data remains below forecasts.
"It's really reassuring to see such great funding progress. We all know the sentiment can shift later on," said Christian Lenk, a strategist at DZ Bank in Frankfurt.
Spanish 10-year yields rose 6 basis points to 3.62 percent, pushing further away from eight-year lows of 3.50 percent hit early on Wednesday.
Yields in all the euro's lower-rated states pushed higher on the back of the weak PMI data.
Demand for Spanish bonds remains supported by domestic banks, although foreign investor holdings have increased in recent months. Some of the buying interest has come from places where investors would simply not touch peripheral bonds one or two years ago.
"A theme which has recently risen in client conversations is that of Asian investors, traditionally big investors in France in recent years, becoming more comfortable with, in particular, Spanish paper," Rabobank rate strategist Lyn Graham-Taylor said.
Expectations that the European Central Bank may ease its monetary policy further due to low inflation have also directed flows towards peripheral bonds.
Last time when yields were so low in Spain in 2006, rating agencies had it on triple-A. Now it is slightly above junk, but analysts say things could be looking up.
Moody's is due to review Spain's Baa3 rating on Friday. Its rating outlook is stable, but some analysts say the agency could lift it to positive after it raised Italy's outlook to stable from negative last week.
"The upcoming Moody's review is expected to point out that the country's fiscal consolidation and efforts in terms of structural changes are bearing their fruits," said Annalisa Piazza, market economist at Newedge Strategy.
Ten-year Italian yields also bounced off eight-year lows of 3.54 percent hit in the previous session as markets showed faith in Prime Minister-designate Matteo Renzi's ambitious reform agenda. They last traded at 3.64 percent.
German 10-year Bund yields, the benchmark for euro zone borrowing costs, were flat at 1.66 percent.