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By Abhinav Ramnarayan
LONDON, Dec 8 (Reuters) - Long-dated euro zone bond yields sold off on Thursday after the European Central Bank extended its asset purchase programme but at a reduced level and introduced measures allowing it to buy more short-dated bonds.
The central bank said its scheme would be extended to the end of 2017 from the original end date of March 31 but said it would trim its monthly purchases to 60 billion euros a month from 80 billion from April.
Many in markets had expected a six-month extension but at 80 billion euros a month.
"This announcement is what the market had feared the most, and it became a reality," said Commerzbank strategist David Schnautz. "Though they have announced a longer QE than expected the key point is we go down from 80 billion euros (a month) to 60."
The ECB widened the maturity range for purchases and said it would buy bonds with yields below the minus 0.4 percent deposit rate.
"It's good for the short end but at the expense of the long end," said Schnautz.
Germany's 30-year bond yield rose 13 basis points to 1.145 percent, its highest level since January, while two-year yields fell 6 bps to minus 0.74 percent, pushing the gap between the two to 187 bps, its highest in over a year.
German 10-year yields, the benchmark for the region, rose 3 bps to 0.38 percent.
Portugal's 10-year borrowing costs shot up 25 bps to 3.80 percent. The ECB is close to its self-imposed limits on how many Portuguese bonds it can buy.
"It was a clever move to extend by nine months," said Martin van Vliet, senior rates strategist at ING. "By showing that the 60 billion euros will be maintained for nine months, (ECB President Mario) Draghi makes it harder for markets to extrapolate about the end of QE in the first half of 2018."
Draghi told a news conference tapering was not even discussed by the ECB's policymakers.
"Even in its announcement of the reduction in asset purchases, it was made clear that the ECB could increase the pace of purchases if needed: a sensible hedge against political risk, tightening in financial conditions and other negative shocks," Fidelity economist Anna Stupnytska said.
The euro initially hit a four-week high of $1.0875 as markets reacted to news of the scaling back of asset purchases. But it quickly turned around and by 1630 GMT was almost 3 cents below that high, down 1.3 percent on the day close to $1.06. (Additional reporting by Jemima Kelly, editing by Nigel Stephenson and Hugh Lawson)