UPDATE 2-UK sees record demand for new 50-year government bond

* Britain raises record orders for new 2065 gilt

* Orders for new 2065 gilt total 21.9 bln stg

* Domestic investors account for 95 pct of sale (Updates with debt agency information, comments)

LONDON, Oct 20 (Reuters) - Britain’s launch of a new 50-year government bond drew record demand, the debt agency said on Tuesday, prompting it to slightly increase its syndication programme for long-dated debt.

The UK Debt Management Office said it sold 4.75 billion pounds ($7.34 billion) of the new 2.5 percent bond maturing in July 2065, via a syndication which drew orders worth 21.9 billion pounds.

That was well above a previous record order book of 16.5 billion pounds at a syndication of a 30-year bond in June 2014. The combination of the coupon and long maturity added up to a record amount of duration -- a measure of exposure to interest rate risk -- taken on by buyers at a British bond sale.

Some analysts said the cheapening of long-dated British gilts in recent weeks could have contributed to the strong demand, with 30-year gilts broadly underperforming their U.S. and German counterparts since September.

Ultra-long dated bonds also tend to benefit from demand from pension funds which have to match assets to their long-dated liabilities, analysts say. Domestic investors accounted for around 95 percent of the allocation, the debt agency said.

“International capital markets have clearly been volatile but, notwithstanding this, our market has continued to absorb our syndication programme smoothly and efficiently,” Robert Stheeman, the DMO’s chief executive, said.

“The new bond will be the longest duration bond in our conventional gilt portfolio, giving our core investors greater flexibility for liability matching purposes.”

In the secondary market, 30-year gilt yields were little changed on the day at 2.61 percent after touching a one-month high of 2.627 percent earlier in the day, but gilts outperformed their long-dated German and U.S. counterparts.

The market overall was down, with 10-year gilt yields rising by 4 basis points to 1.87 percent as prices fell, but German Bund prices dropped more sharply with the yield spread narrowing by 3 basis points on the day to 123 basis points.

“Record demand for the new 2065 gilt auction boosted the longer-end, prompting a modest narrowing of the spread between 10-year gilts and 30-year gilts,” Nick Stamenkovic, strategist at RIA Capital Markets said.

“Pension funds maintain strong demand for duration as they match longer-dated assets and liabilities.”

The yield gap between 30-year and 10-year gilts narrowed 4 basis points to 75 basis points after the result of the syndication was released, with 30-year paper outperforming.

The bond was priced at 98.403 pounds, equivalent to a yield of 2.557 percent, or 1.5 basis points above the yield on the 2068 gilt against which it was priced. The debt agency said it raised its long syndication programme by 200 million pounds to accommodate for the strong demand, and would reduce its programme for ad-hoc auctions by the same amount.

“The demand is pretty strong. We were sort of expecting that because the sector had cheapened quite a lot and there are plenty of reasons why one should be involved at the long end of the curve,” said Vatsala Datta, UK rate strategist at RBC.

“By any measure, this is a pretty big book size and unsurprisingly the DMO (Debt Management Office) has upped the target as well.”

The syndication needed to raise around 4.5 billion pounds to meet the debt agency’s target for conventional bond issuance via syndication for the 2015/16 financial year.

The bookrunners on the deal are Bank of America Merrill Lynch, J.P. Morgan, Royal Bank of Scotland and Santander. ($1 = 0.6456 pounds) (Reporting by Ana Nicolaci da Costa; editing by William Schomberg)