* Italy selling new 10-year inflation-linked bonds
* Demand expected to be strong at the syndicated sale
* Top-rated bonds rally on China growth, credit concerns
By Emelia Sithole-Matarise
LONDON, March 12 (Reuters) - Italian bond yields rose further from eight-year lows on Wednesday as Rome launched a new 10-year inflation-linked bond despite expectations euro zone price pressures will remain depressed.
Italy underperformed top-rated euro zone bonds, which were rallying on growth and credit concerns in China as well as mounting tensions in Russia's standoff with western countries over Ukraine.
Rome aims to capture demand from specific institutional investors at the syndicated sale of the 10-year bond linked to euro zone inflation, banks hired to manage the sale told IFR, a Thomson Reuters service.
Wednesday's sale is Italy's first of a long-dated so-called linker in nearly three years. Some analysts said it should benefit from improved appetite for Italian sovereign debt rather than investors seeking protection from inflation.
Euro zone inflation for February is estimated at just 0.8 percent year-on-year, Eurostat said late last month.
"The overall story for the Italian linker auction today is not so much whether inflation expectations are high or low but about the performance potential Italian bonds still have. Linkers should perform also along with that," said Marius Daheim, chief interest rate strategist at Bayerische Landesbank.
"There should be demand for this linker from institutional clients such as pension funds and insurers."
Yields on conventional Italian 10-year bonds were last 2 basis points up at 3.42 percent. Spanish equivalents were 1.4 bps higher at 3.34 percent.
Italy will also auction up to 7.75 billion euros of fixed-rated bonds on Thursday as it keeps up a cracking pace in its 2014 fund raising.
YIELD GRAB INTACT
Societe Generale strategist Jorge Garayo said the 10-year linker should "reinvigorate" interest in the longer-dated part of the Italian curve, which has not seen new issuance in nearly four years.
"Demand for a new 10-year BTPei is likely to come from the yield pickup perspective and diversification from core (euro zone) linkers, rather than from investors expressing an inflation view," he said in a note.
Germany was also due to sell up to 4 billion euros in two-year bonds.
German 10-year yields fell 3.8 bps to 1.60 percent, as concern about a slowdown in growth and financial sector trouble in China - the world's second biggest economy - lifted demand for safe havens.
Yields on Dutch, Austrian, Finnish and French bonds were also lower. Comments by European Central Bank Executive Board member Peter Praet on Wednesday that the central bank was ready to use non-standard policy measures to deliver stable prices helped the rally in top-rated bonds.
Praet's comments followed remarks on Tuesday by ECB Vice President Vitor Constancio that markets, rattled last week after the ECB refrained from easing monetary policy, had missed the central bank's emphasis on slack in the economy.