* Greek yields fall to lowest since June 2010 after upgrade
* Italy opens books on new 30-year bond via syndication-IFR
* German Bunds fall along with UK gilts
By Ana Nicolaci da Costa
LONDON, May 15 (Reuters) - Ten-year Greek government bond yields tumbled to their lowest in nearly three years on Wednesday, one day after Fitch upgraded the country's sovereign credit ratings.
Fitch Ratings raised Greece to B-minus from CCC citing a rebalancing of the economy and progress in eliminating its fiscal and current account deficits that have reduced its risk of a euro zone exit.
The sharp fall in borrowing costs suggested investors were pricing out that possibility, as well as the risk of another default, analysts said.
But the move also coincided with a broad fall in euro zone borrowing costs in April fueled by abundant central bank cash in the financial system. Thin liquidity in a debt market that was restructured in March 2012 also exaggerated the fall.
"As with all these peripheral markets, the reach for yield is all too obvious. In this particular case, at least, there is positive ratings news," Marc Ostwald, strategist at Monument Securities said.
Ten-year Greek yields fell to 8.21 percent - their lowest since June 2010 and not far from the psychologically-important 7 percent level. Greek borrowing costs were last 75 basis points lower at 8.61 percent.
"The euphoria that exists in the markets overall has slipped into Greece as well without necessarily (being) realistic because Greece has not resolved the major issues that we have," Athanasios Ladopoulos, chief investment officer at Swiss Investment Managers said.
Italian yields rose as investors sold debt and made room for the syndication of a new 30-year Italian bond.
Italy opened the books after receiving an initial interest of over 7.7 billion euros, a bank managing the deal said, according to IFR - a Thomson Reuters news and market analysis service..
Investors expected solid appetite for the debt after successful syndications from Slovenia and Portugal earlier this month and huge demand for Spain's new 10-year bond in the previous session.
"I don't think they would do it unless there was good demand for it," a trader said.
Ten-year Italian government bond yields rose 2.1 basis points to 4.02 percent and the thirty-year equivalent was up 3.2 bps at 4.82 percent. Ten-year Spanish bond yields rose 3.6 bps to 4.37 percent.
On the other side of the credit spectrum, German Bunds fell 29 ticks to 144.45. They eased along with UK gilts, which extended losses after the Bank of England modestly raised its growth forecasts and Governor Mervyn King said the economy was set for a recovery.
A sale of two-year German debt attracted bids worth 2 times the amount on offer. It was well-received but demand was slightly less than at a previous sale of similar paper.