* Portuguese yields fall to pre-bailout levels
* Lack of detail limits selling pressure on Bunds
* Borrowing costs fall at Spanish bill auction
By Emelia Sithole-Matarise and Kirsten Donovan
LONDON, Aug 21 (Reuters) - Peripheral euro zone government bond yields fell on Tuesday and were expected to drift lower in coming days on expectations the European Central Bank will buy struggling countries' debt to curb their borrowing costs.
The prospect of eventual ECB intervention in the market pushed Spanish, Italian and Portuguese yields down, with Lisbon's 10-year borrowing costs falling to lows seen before the country agreed an international bailout in May last year.
While details of any bond-buying remain hazy, speculation has increased since a German magazine said at the weekend the ECB was examining plans to cap Spanish and Italian bond yields.
Traders cited a story in Britain's Daily Telegraph newspaper, which said it could confirm the German report, as a reason for the continuation of the trend begun on Monday.
The ECB had sought to quash speculation about such a plan on Monday, and referred back to the statement when asked about the Telegraph report.
"The underlying driver is still the expectation that the ECB is going to come up with a convincing intervention programme ... If it doesn't deliver we could see spreads move back to new highs," said Niels From, a strategist at Nordea.
"For now I'd expect this positive sentiment in southern Europe to last for a bit but there are some events that could make this a binary market like the German Constitutional Court ruling on the ESM (permanent bailout programme) in September and how the ECB programme will be structured."
September may prove to be decisive for markets. The ECB holds its next policy meeting on Sept. 6 and the German court will rule on ratification of the euro zone rescue fund on Sept. 12. European finance ministers meet on Sept. 14 and 15.
Against this more favourable backdrop for riskier assets, Spain sold 4.5 billion euros of 12- and 18-month T-bills. Its borrowing costs fell but stayed punitively high.
Spanish 10-year yields fell 10 basis points to 6.24 percent, with shorter-dated yields down as much 16 bps to 3.43 percent. Italian bond yields also dropped.
The expectation of mass ECB bond buying has already halved two-year Spanish yields over the last month.
"I'd buy into weakness at the front end of Spanish and Italian curves. We do believe that some intervention programme is coming from the ECB," said Peter Schaffrik, head of European interest rate strategy at RBC. He is targeting a fall in Spanish two-year yields to 2-2.50 percent in the next three months.
Portuguese 10-year yields fell as much as 30 bps to 9.40 percent, their lowest since April 20. Portugal asked for a bailout on April 6 and the deal was announced on May 3.
With speculation about eventual ECB action dominating trade, safe-haven Bund futures fell 62 ticks on the day to settle at 141.38.
"People have been closing out their long positions in Bunds and there's continued buying in Spain, particularly the five-year area," a trader said, adding that he had seen some international investors looking to buy the debt.
Ten-year Bund yields were 5 bps higher at 1.56 percent, having tested the 1.60 percent upper limit of their three-month range in recent days but failing to break above it, suggesting selling pressure may ease in the absence of further developments in the debt crisis.