* European shares extend recovery in early trade * Borrowing costs set to rise at Italian debt auction * Euro firmer against dollar LONDON, April 12 (Reuters) - The euro neared a one-week high against the dollar and European bond markets steadied on Thursday as investors awaited an Italian debt sale that will show whether concerns over Spain are spreading to other debt-laden euro zone nations. A recent sell-off in Spanish debt has largely calmed down following comments from European Central Bank executive board member Benoit Coeure, who hinted that the central bank might be willing to restart buying of debt in the market. "Should the Italian auction disappoint, we could see the euro reverse some of its gains," said Ankita Dudani, G-10 currency strategist at RBS Global Banking, who expects the bond sale to go through without much of a hitch. The euro was up 0.2 percent at $1.3130, while the dollar measured against a basket of major currencies was down 0.2 percent at 79.62. European equity markets started slightly higher ahead of the Italian bond auction, adding to the previous session's tentative recovery following a week-long slide. The MSCI world equity index was up 0.2 percent 322.71 after a good start to the U.S. corporate reporting season lifted Wall Street stocks and an Australian employment indicator encouraged the rebound in Asia. The FTSE Eurofirst index of top European shares rose 0.1 percent to 1034.83 at the start, with Germany's DAX index leading the way, up 0.5 percent. Safe-haven German bond futures were 6 ticks lower at 139.76, with 10-year cash bond yields up 1 basis point at 1.70 percent. Italy's borrowing costs are expected to rise by about a full percentage point from a month ago at its 5 billion euro auction of new three-year bonds later, after the rate it pays for one-year money more than doubled at an auction on Wednesday. (Reporting by Richard Hubbard; Editing by Will Waterman)

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