By John Geddie and Helen Reid
LONDON, March 23 (Reuters) - Investors snapped up financial stocks and government bonds from the euro zone's weakest countries on Thursday after banks took more cheap long-term loans from the European Central Bank than expected in the final round of a crisis-fighting scheme.
The loan scheme originally designed during the 2011 debt crisis was tweaked last year to allow banks to get paid up to 0.4 percent of what they borrow on condition that they lend more to companies or consumers.
In the last of these targeted long-term refinancing operations (TLTRO) on Thursday, some 474 banks took up 233.5 billion euros of four-year loans, well above the 125 billion euros expected in a Reuters poll.
This suggests banks anticipate a rise in lending, while analysts said they are also likely to continue to invest some of the money in government bonds from the likes of Portugal and Spain which pay relatively high levels of interest.
With the ECB also set to trim the amount of money it pumps into the financial system by cutting its monthly bond purchases next month, some see the end of the TLTRO scheme as a signal that the worst is over for the bloc.
"That (TLTRO) was a policy designed for extraordinary times, we are not in them now," said Nick Gartside, JP Morgan Asset Management's international CIO for fixed income.
"You have growth above trend, you have politics calming down and you have the market pricing in both tapering (of bond purchases) and higher deposit rates. We are shifting from a story that was about divergence to one of convergence and it will be the ECB doing the converging."
Yields, which move inversely to prices, of Portuguese , Spanish and Italian bonds fell as much as 5-7 basis points before paring those falls as the session wore on.
That narrowed the gap with German equivalents, which also faced upward pressure from rising U.S. bond yields .
The premium investors demand to hold Portuguese bonds over German equivalents briefly fell to a three-month low. The premium for Spanish bonds fell to a one-month low.
"The talk that this money would be used for carry trades seems to be confirmed by these results and the market reaction," said ING rates strategist Benjamin Schroeder.
An index of euro zone banks climbed almost 1 percent, outperforming the broader euro zone stock index which was up 0.8 percent on the day.
"The cheap funding boosts the banks' interest margins," said Arne Petimezas, analyst at AFS Group. "This is the last time they could get such cheap loans, so they can pay down some of their bonds."
In the future, banks will only be able to get either one-week or three-month loans from the ECB, which will be an enormous cut in the duration of credit available to them. (Additional reporting by Patrick Graham; Editing by Andrew Heavens)