* Sold 5.73 bln euros in bonds vs 4.50-6.25 bln euro range
* Yield on new 5-yr bond jumps to 5.66 pct from 4.86 pct end-April
* Ten-year yields 6.03 pct from 5.84 pct a month ago
By Valentina Za
MILAN, May 30 (Reuters) - Italy paid a high price for the troubles of fellow problem debtor Spain on Wednesday when its 10-year borrowing costs topped 6 percent at auction, marking a new high since January and casting a shadow over its funding plans.
Spain's struggle to prop up its banks and fears that Greece will leave the euro have undone the support that a flood of central bank liquidity had brought earlier this year to Italy, the world's fourth-largest sovereign debtor.
Italy raised 10-year funds at 5.8 percent in April and this benchmark measure of debt costs hit a seven-month low in March.
The climb in yields was even sharper on a five-year maturity. The Treasury paid 5.66 percent, the highest since December, on a new June 2017 bond - 80 basis points more than a month ago.
Despite the generous yields, Italy missed the top of a planned issue range of up to 6.25 billion euros ($7.8 billion).
The volume of bids for Wednesday's 5.73 billion euro auction was broadly in line with a month ago, but analysts saw a sign of weakness in the fact that the bonds were sold at a discount compared with market levels.
"We're seeing Italy being taken hostage by the Spanish concerns. The market does not discriminate any more," said Michael Leister, rate strategist at DZ Bank in Frankfurt. "You either buy periphery as a whole or you sell it. The market isn't happy with this auction."
Italian bonds suffered heavy losses in the secondary market ahead of the auction, and only partially trimmed losses in its aftermath. Benchmark 10-year yields stood at 6.06 percent by 1306 GMT, more than 470 basis points above equivalent German yields.
In a sign of growing market stress, the yield gap between Italy and Germany on a shorter two-year maturity was not far from that level, at around 445 basis points.
"The deterioration of peripheral markets appears to be accelerating, which is mainly a function of stress stemming from Spain's banking sector and the Greek exit risks," said Peter Chatwell, a strategist with Credit Agricole in London.
With international investors estimated to now hold only about a third of Italy's total debt, from roughly half before the global financial crisis took hold, domestic buyers shoulder the bulk of Treasury issuance.
Italian banks increased their net holdings of euro zone government bonds by only 6.6 billion euros in April, after a record 23.7 billion euro increase in March, according to ECB data released on Wednesday. The figures point to fading support for Italian bonds from the cheap ECB funds that lenders have used to fatten their portfolios.
Further complicating Italy's issuance plans, volatility and risk-aversion on government bond markets are expected to remain high ahead of a Greek election in mid-June, which is crucial to determine the country's future as a euro member.
The Treasury has met so far slightly less than half of an estimated bond issuance target of 215 billion euros for 2012.
Although Italian bonds have largely outperformed Spanish ones lately, analysts said Rome would likely suffer if Spain were to ask for international support or boost debt issuance in a bid to shore up its banks and its overspending regions.
Italy raised a total of 18.5 billion euros in new debt this week. Yields hit their highest since December both at a six-month bill auction on Tuesday and at a sale of two-year paper the previous day. ($1 = 0.7977 euros)