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* Peripheral bonds in demand ahead of final TLTRO operation
* Gap between Portuguese/German yields at 3-month low
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr
By John Geddie and Marc Jones
LONDON, March 23 (Reuters) - Bonds from vulnerable euro zone governments like Portugal and Italy were in demand on Thursday as the European Central Bank prepared to dispense the final instalment of cheap, long-term bank loans that have been running for over five years.
Investors appeared to be anticipating solid demand for the cash with the central bank also set to trim the amount of money it pumps into the financial system by cutting monthly bonds purchases from April from 80 billion euros ($86.25 billion) to 60 billion euros.
"The driving force for the market reaction is the extra liquidity provided to the market, as investors see it as ... more money that can be invested into bonds or for lending," Mizuho strategist Antoine Bouvet said.
"This scheme is high up on the list of things that can be reintroduced if conditions sour again."
The consensus among money market traders polled by Reuters was for a take-up of 125 billion euros although forecasts ranged widely from 50 billion to 300 billion euros. The net amount will be reduced slightly with 16.7 billion euros of older loans due to be paid back.
The result is due around 1030 GMT. It is the last of four targeted long-term refinancing operations announced last year but also marks the end of a run of handouts that began in 2011 as the ECB's flagship response to the euro zone debt crisis.
In the future, banks will only be able to get either 1-week or 3-month loans from the ECB, which will be an enormous cut in the duration of credit it lends to them.
Yields, which move inversely to prices, on Portuguese , Spanish and Italian debt fell 1-3 basis points ahead of the results.
That closed the gap with German bond yields which were flat at 0.41 percent.
The gap between Portuguese and German bond yields held at its lowest in over three months at 343 basis points. The gap between Spanish and German equivalents held at a one-month low of 129 basis points.
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 ($1 = 0.9276 euros)
Editing by Jeremy Gaunt