UPDATE 1-Spain taps keen market at special long-term debt sale

* Sells 800 mln eur of 2029, 2020, 2041 paper

* Yields fall on all three maturities from previous sales

By Paul Day

MADRID, March 14 (Reuters) - Spain saw solid demand for its long-termbonds on Thursday at an unscheduled auction reserved for market makers, riding a wave of enthusiasm for its debt that has strengthened as market concerns about Italy have grown.

The Treasury sold 803 million euros ($1.0 billion) of paper due in 2029, 2040 and 2041 - less than recent issues of the same bonds but at lower yields. No target amount had been set for the auction.

"It looks like a decent set of auction results," rate strategist at Rabobank Lyn Graham-Taylor said.

"The size was roughly as anticipated and obviously it was always going to go well given that it looks like this was a request from primary dealers,"

The average yield on the shortest, 17-year paper fell to 5.224 percent from 5.787 percent last month.

Other analysts were less upbeat.

"Given that Spain issued bonds with longer maturity they had to give investors some discount and there was not a strong demand for those bonds. It shows that Spain can outperform Italy but it's not easy even for them to issue long-dated bonds," said Alessandro Giansanti, rate strategist at ING.

An economy ministry official said the sale had been relatively small as it was aimed at satisfying a technical demand from market makers after some maturities had become illiquid.

Italy, plagued by political paralysis following an inconclusive election that triggered a credit rating cut last week, was forced to pay its highest three-year borrowing costs since December at an auction on Wednesday.

Last July, Spain saw bond yields rise to levels not seen since the euro was introduced, with returns on 10-year paper rising above 7.6 percent - prompting expectations Madrid would be forced to seek a sovereign bailout.

But they fell sharply on a subsequent European Central Bank pledge to support Europe's struggling debt markets and have stayed relatively low - despite signs that Spain's deep recession will continue into late this year.

The yield on the Spanish benchmark stood at around 4.8 percent on Thursday.

The stable yields have helped the Treasury sell 30.6 percent of its 2013 medium- and long-term target including Thursday's auction.

The appetite for debt from Spanish paper has also benefited its largest companies, which have also rushed to sell debt in the first part of the year after an investor drought through much of 2012.

On the sovereign issue, the highest demand was for the January 2029, which sold 134 million euros and was 4.1 times subscribed. The bond due in July 2040 sold 304 million euros at 5.434 percent, down from 5.893 percent in December, and the July 2041 paper sold 365 million euros at 5.432 percent, down from 5.696 percent in January.

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