* Madrid to vote on direct rule power at 1200GMT
* Investors see regional elections as likely outcome
* Such a vote might reduce power of secessionists (Updates prices and Spain)
By John Geddie and Fanny Potkin
LONDON, Oct 27 (Reuters) - The premium investors demand to hold Spanish government bonds over benchmark German peers held near one-month lows on Friday ahead of plans for Madrid to impose direct rule over Catalonia.
The relative calm in markets is in contrast to the bouts of volatility seen since Catalonia staged its independence referendum on Oct. 1, ruled illegal by Spanish courts.
The European Central Bank’s announcement on Thursday that it will extend its monetary stimulus programme until at least next September has contributed to the feel-good feeling among euro zone markets generally.
But investors in Spain also appear to be looking beyond what could be a tumultuous few days towards the prospect of fresh leadership elections in Catalonia that might reduce the power of secessionists.
“For investors, it is a case of waiting to see exactly as and when an election is called, whether that is the current Catalan government calling it themselves or having it imposed upon them by Madrid,” Rabobank strategist Matt Cairns said.
“The market is likely to welcome that because the ability for (Catalan leader Carles) Puigdemont to hold on to power looks tenuous at best.”
The upper house of the Spanish parliament - the Senate - is expected to vote at 1200GMT on the government’s application of Article 155 of the constitution, which allows the central administration to take over a region when it breaks the law.
Rajoy is then expected to convene his cabinet to adopt the first measures to govern Catalonia directly. This could include sacking the Barcelona government and assuming direct supervision of Catalan police forces.
BBVA bank warned on Friday that Spain’s economy could grow less than 2.5 percent in 2018 if the political uncertainty dragged on.
Spanish 10-year bond yields fell as much as 5 basis points to a two-month low of 1.52 percent on Friday, before settling at 1.55, having fallen 10 bps on Thursday in their biggest daily drop in six months.
The kept the gap with German peers at 114 bps, still close to the 110 bps level struck on Thursday which was the tightest in a month.
Spain’s main stock index was down 1 percent on Friday, barely holding on to the 1.9 percent gain booked on Thursday.
For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets
Editing by Peter Graff