* Italy's net liabilities at record high
* Money leaves country for 8th straight month
By Francesco Canepa
FRANKFURT, Dec 1 (Reuters) - Money flowed out of Italy for the eighth straight month in October, data from the euro zone's payment system showed on Thursday, highlighting concerns among investors as Italians vote in a referendum on Sunday that could bring down the prime minister.
Italy's net liabilities towards the Target 2 payment system of euro zone central banks rose by 1.5 billion euros in Oct. to 355.5 billion euros, the highest level on European Central Bank records dating back to 2008.
Target 2 balances, which measure flows of money in and out of euro zone countries, are watched by investors for signals that capital is leaving an economy, as happened to Greece, Italy and Spain during the 2010-12 debt crisis.
Italian government bonds have sold off more sharply than their euro zone peers in recent weeks as investors worried that the Dec. 4 referendum could unseat Prime Minister Matteo Renzi and plunge the euro zone's largest debtor into political turmoil.
The ECB has said the recent flow of money out of countries such as Italy and Spain, coupled with inflows in Germany, is due to national central banks' purchases of bonds from German-based foreign investors as part of the ECB's own stimulus programme.
But the fact that the money then sits in Germany illustrates that the euro zone remains fragmented and investors and banks are reluctant to invest in weaker economies despite higher bond yields and rates on the inter-bank lending market.
While the flow of money out of Italy slowed in October it has been steadier and more pronounced that Spain's since March.
Comparing it to the size of Italy's gross domestic product, Harvard economists Carmen Reinhart went as far as calling it a capital flight.
"Italy's Target 2 deficit is above 20 percent of GDP - its worst reading to date," she said in an article published last week. "By some of the standard definitions, these are crisis-level reserve losses."
Speaking to Reuters last week, ECB vice-president Vitor Constancio said the Target 2 imbalances were simply a result of the bond-buying programme and in no way connected with economic flows.