* Election poll puts Catalan secessionists behind
* Italy receives unexpected rating upgrade from S&P
* Peripheral bond yields tumble 10-11 bps
* Portugal yields lowest in 2-1/2 yrs, Italy’s lowest since Jan (Updates prices)
By John Geddie and Fanny Potkin
LONDON, Oct 30 (Reuters) - Borrowing costs in southern Europe tumbled on Monday after an opinion poll suggested separatists in Spain’s Catalonia region may lose a December election and Italy received its first rating upgrade from Standard & Poor’s in at least three decades.
The poll, which showed a small lead for parties opposing a split of Catalonia from Spain, was the first since Madrid called the Dec. 21 vote last Friday after dismissing Catalonia’s regional government and dissolving its parliament.
On Sunday, hundreds of thousands of supporters of a unified Spain filled Barcelona’s streets in one of the biggest shows of force by those who have largely looked on as regional leaders pushed for independence.
Italy meanwhile on Friday received an unexpected upgrade in its debt rating from BBB- to BBB, with S&P Global citing a strengthening economic outlook, growing investment, a steady rise in employment and improvements in the debt-laden banking sector.
“We were expecting a positive outlook by S&P but they went further by upgrading the rating to triple B, so that’s clearly one positive for today’s auction,” Commerzbank’s head of rates research, Christoph Rieger, said.
Italy elicited strong demand when it sold five- and 10-year debt in an auction on Monday.
Normally, yields rise before an auction as investors make space for the new supply, but the downward pressure on bond yields from the ratings upgrade and last week’s European Central Bank decision to extend monetary stimulus well into 2018 proved too strong.
Italy’s 10-year bond yield slid 10 basis points to 1.84 percent, its lowest since January, and was on track for its biggest one-day fall in more than seven weeks.
That pushed the gap over German Bund yields to around 147 bps - its tightest since December 2016.
Spanish bonds were also a strong performer on the day, with 10-year yields down 10 bps at 1.49 percent, recovering some of the ground lost in recent weeks as the political crisis in Catalonia deepened.
Portuguese bonds, another so-called peripheral market that tends to trade in line with Spanish and Italian peers, were also caught up in the rally. Portuguese 10-year yields were set for their biggest one-day fall in six weeks, down 11 basis points on the day, at their lowest level in around 2-1/2 years .
The ECB’s decision last week to extend its asset purchase programme to at least September 2018, albeit at a slower pace, has also encouraged investors back into riskier debt and stock markets.
Spain’s stock market gained 2.6 percent on Monday, while Italy’s main index was up 0.2 percent.
The euro was up 0.3 percent against the dollar at $1.1642 , recovering from a three-month low struck on Friday. (Reporting by John Geddie and Fanny Potkin; Additional reporting by Dhara Ranasinghe; Editing by Mark Heinrich and Andrew Heavens)