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* Spain mandates banks for first 31-year bond in four years
* Italy looks to markets for 7-year issue -IFR
* Telefonica, Santander, Indra, Gas Natural issue debt
By Paul Day and John Geddie
MADRID, Oct 8 (Reuters) - The Madrid and Rome Treasuries and some of Spain's largest firms moved to raise funds on Tuesday, taking advantage of a benign phase in debt markets as optimism for Europe's economic recovery grows and risk appetite picks up.
Southern Europe has felt the worst of the five-year euro zone debt crisis with sovereign debt yields in Spain and Italy reaching record highs through 2012, while Spanish corporate financing was almost entirely paralysed, notably for its troubled banks.
Sovereign financing costs have dropped steadily since the summer of last year after European Central Bank President Mario Draghi said he was prepared to do all it took to defend the euro and as euro zone economies emerged from recession.
On Tuesday, the Spanish Treasury mandated banks for a 31-year bond, the first of such a long maturity since 2009, while sources at lead banks told Thomson Reuters news and financial service IFR that Italy was marketing a new seven-year bond.
Spain's leading companies also turned to fixed income, with its largest bank Santander, utility Gas Natural and telecommunications giant Telefonica all in the debt market on Tuesday, IFR reported.
"This is about falling yields and it seems to be good timing. If there's no obvious risk element to come and everything else lines up properly, then there doesn't seem to be a good reason not to come to the market," said Michael Michaelides, rate strategist at RBS.
The Spanish sovereign bond would probably be issued on Wednesday, a source at the Treasury said, while an Economy Ministry source said between 2 and 3 billion euros ($2.71-$4.07 billion) was targeted.
"This reflects the stability of the market, improved confidence in Spain and investor interest in long-term (debt)," the Treasury source said.
Santander Consumer Finance marketed a senior unsecured bond, after finalising a deal to buy 51 percent of the consumer finance business of Spanish department chain El Corte Ingles on Monday.
The deal was the latest sign of growing confidence that Spain's recession-plagued economy is emerging from the mire.
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Spain's Treasury has already reached some 86.2 percent of its 2013 medium- and long-term borrowing target, making the most of some of the country's lowest financing costs since before the economic crisis began in 2008.
Spanish and Italian bond yields rose on Tuesday as lack of progress in resolving the U.S. budget stalemate made investors wary of exposure to riskier assets.
But the U.S. budget deadlock was still having only a limited effect on Spanish debt, analysts said, with benchmark yields well below those recorded last year.
The economy ministry source suggested that situation was unlikely to affect the plans to issue the new long-term paper.
"I've seen a lot of talk, and movements in the market, but my impression is that if one thing the Americans have a clear about is that is how markets work," the source said. "They know they have time to react, and I don't see a problem."
Potential risk scenarios in Europe confronting investors include discussions over banking union in the Eurogroup later in October, details of a European Central Bank financial sector stress tests early next year and talks on Greece in December.
"After the Italian risk has seemingly calmed down, what's the upside of waiting?" RBS's Michaelides added.
As market conditions eased for Spain, which at the height of crisis seemed doomed to join Greece, Portugal and Ireland in applying for sovereign aid, it has also floated the idea of issuing a 50-year bond in coming months, a Treasury source said previously.
Spain mandated Barclays, BBVA, BNP Paribas, CaixaBank, Citigroup and Santander GBM for the new syndicated reference bond maturing Oct. 31, 2044, IFR said.
Credit Agricole CIB, Credit Suisse, HSBC and UniCredit have been mandated to sell the new Italian bond, maturing May 1 2021 and likely to be issued on Wednesday, IFR reported citing a lead manager. (Reporting By Paul Day; Editing by Fiona Ortiz, John Stonestreet)