(Adds more trader comment, details)
By Francesca Landini
MILAN, Jan 29 (Reuters) - Italy's six-month borrowing costs tumbled to their lowest in nearly three years at an auction on Tuesday as investors continued to snap up its debt, shrugging off a deepening scandal at the world's oldest bank.
Rome sold 8.5 billion euros ($11.4 billion) of six-month Treasury bills at a yield of 0.73 percent, much less than the 0.95 percent it paid at a similar sale in late December.
The yield was the lowest the treasury had paid to borrow over six months since March 2010, but traders said it still offered an attractive pick-up over German paper offering returns of almost zero.
Buyers of low-risk German debt would need to move along the curve to the five-year maturity to secure a comparable 0.7 percent yield.
Demand for the safest assets has weakened after the European Central Bank said on Friday that banks would repay 137 billion euros of three-year crisis loans early this week, a bigger-than-expected figure that has pushed up money market rates.
"It is more expensive for banks to raise funds on the six-month maturity today than it was last week. This is why they are asking for a decent return on the six-month bills," one trader said.
The growing scandal at Banca Monte dei Paschi, founded in 1474 and based in the Tuscan town of Siena, had little impact on the auction, traders said, as investors see it as an isolated case without risks for other Italian lenders.
"The issue of Monte dei Paschi is having a negligible effect on Italy's borrowing costs. We have seen worse scandals in Europe, think about the Libor," said the trader, referring to the rigging by a number of banks of the benchmark interest rate.
Italy's third biggest lender, which revealed last week that complex derivatives trades could lead to losses of as much as 720 million euros, is due to receive 3.9 billion euros in state aid from the treasury.
Economy Minister Vittorio Grilli will address parliament on Monte Paschi on Tuesday afternoon.
Italy will return to the debt market on Wednesday with an auction of five and 10-year bonds which could net it up to 6.5 billion euros and take its total fundraising in the first month of the year to nearly 15 percent of its 2013 target.
$1 = 0.7429 euros Additional reporting by Gabriella Bruschi, Irene Chiappisi and Giulio Piovaccari; Editing by Catherine Evans