Oct 5 (Reuters) - An Italian bond sale next week should find decent demand with the shorter-dated paper eligible for the ECB's bond-buying programme and sentiment towards the euro zone's peripheral issuers improving. Although the initial beneficiary is expected to be Spain, the prospect of the European Central Bank buying bonds with maturities of up to three-years has eased borrowing costs for Italy as well, partly because the country would also be able to ask for help if need be. Italy's debt is also buffeted by the prevailing sentiment towards peripheral issuers, dictated by the ebb and flow of the Spanish crisis, something which has shown a marked improvement since late July when ECB President Mario Draghi pledged to do whatever it takes to preserve the single currency. "As we saw with last week's Spanish auction the short-end is underpinned because of expectations the ECB will buy bonds," said Nick Stamenkovic, rate strategist at RIA Capital Markets. "Obviously, Italy isn't in the firing line yet but it will benefit from improved sentiment towards Spain." Italy will sell three-year bonds and is likely to sell small amounts of some of its other outstanding issues. Full details will be announced on Monday. Rome said last month that new three- and five-year bonds would be launched in the fourth quarter. "(Next week's auction is) going to go okay ... especially in an environment that's not so negative compared with a few weeks ago," said ING rate strategist Alessandro Giansanti. Around 20 billion euros of coupon and redemption payments due on Oct. 15 will also support the sale. Italy has completed around 73 percent of its 2012 bond issuance, according to Reuters data, and last month sold its longest-maturity bond in over a year - a 15-year issue. However, it has been increasingly forced to rely on domestic investors as foreigners have been steadily selling the country's debt this year. "The real test for Italy is the longer-dated auctions, particularly over 10 years where overseas investors tend to be the dominant factor and they've left the market in droves," Stamenkovic said. Some traders reported some buying of Italian debt by foreign investors in recent weeks but with the country slashing growth forecasts and still at risk of credit rating downgrades, Rome is likely to remain dependent on its domestic banks for some time to come. "Non-domestic conviction still doesn't seem particularly high at the moment," one trader said. Nonetheless, Italy's bonds have been one of the best performers in the euro zone this year, returning 14.85 percent by the end of the third quarter across all maturities, taking into account the price of the debt and reinvested coupon payments. CORE The Netherlands will kick off the week's issuance on Tuesday selling five-year bonds, followed by a five-year German bond sale on Wednesday. Although recent 10-year bond auctions have struggled - with the last two failing to attract enough demand to cover the amount on offer - shorter-maturity debt fared better with investors still keeping cash in safe-haven assets given lingering concerns over the euro zone debt crisis and the economic outlook for the region. ING's Giansanti said that if there was no negative news on the euro zone before the sale, then there may be some weakness, especially as five-year paper is relatively expensive on the German yield curve. But, again, more than 18 billion euros of coupon and redemption payments should support the sale. Belgium has the option to sell bonds on Friday if there is enough demand from dealers.

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