* Italian 10-year yields hit euro era high of 7.5 pct * LCH.Clearnet SA. margin increase on Italian debt hits BTPs * Yield curve inverts, reflecting repayment nerves By Marius Zaharia and Neal Armstrong LONDON, Nov 9 (Reuters) - Italian 10-year bond yields surged past the 7 percent level widely viewed as unsustainable on Wednesday as Prime Minister Silvio Berlusconi's promise to resign failed to spur hopes the country can deliver on long-promised economic reforms. Yields soared to euro era highs of 7.502 percent amid an investor exodus sparked by a move by clearing house LCH.Clearnet SA to increase the margin call on Italian debt that carried unwelcome echoes of the run-up to the euro zone's sovereign bailouts. The European Central Bank responded by "aggressively" buying Italian debt, one trader said, narrowing the yield by around 20 basis points. Italy has been the focus of market anxiety in recent days, with investors increasingly worried that political turmoil is hindering efforts to stop the third biggest euro zone country becoming engulfed by the region's debt crisis. A 7 percent yield was seen by many in markets as a line in the sand, given that Portugal and Ireland were forced to seek bailout after yields on their bonds exceeded that level. The cost of insuring Italian debt against default rose 20 bps on the day to 543 bps. The spread between Italian and safe-haven German 10-year bonds rose to 576 bps, exceeding 500 bps for the first time as German December Bund futures were last 82 ticks up on the day at 138.84. Traders said the contract high at 139.19 hit in September was in the market's sights. "Unfortunately the Italian bond market is the biggest victim of this political football that's being kicked around the euro zone at the moment," said Sean Maloney, rates strategist at Nomura. "If this carries on then the ECB may well be forced to intervene more aggressively (with bond buying). It's an illiquid market and they have the firepower to turn things around." The ECB, which has been buying Italian bonds in the secondary market since August to keep yields down, has said its bond purchases are conditional on Italy pursuing reforms. TOO BIG TO FAIL? Short-term Italian yields rose even more, with the yield on two-year bonds rising above those on 10-year debt also for the first time since the launch of the euro -- a clear signal of investors' rising concern they may not get their money back. "You're looking at bid/offer spreads in Italian BTP's of 2, 3 and 4 points wide and not in big size. It's getting fairly untradable," said a trader. Italy's debt is equivalent to 120 percent of economic output and it is deemed too big to be bailed out with current resources. Worries that the debt crisis could be infiltrating the core of the euro zone were reflected in the spread of 10-year French government bonds over their German equivalent blowing out to a euro era high around 140 basis points. Italian premier Berlusconi was seen by many as an obstacle in the way of structural reforms and the sell-off in Italian bonds accelerated earlier this year when he hesitated to pass the austerity steps proposed by his finance minister. But even when Berlusconi goes, many market players see no guarantee that reforms to cut debt and boost growth will be quickly implemented. Questions also remained on issues such as whether the European Financial Stability Facility (EFSF) bailout fund will have enough power to fight contagion and whether euro zone policymakers are willing to take further steps against the crisis.