* Initial relief after Letta survives confidence vote wanes
* Yields come off lows as investors make room before debt sale
* ECB's ultra-easy policy to support euro zone bonds broadly
By Emelia Sithole-Matarise and Marius Zaharia
LONDON, Nov 27 (Reuters) - Italian bonds held steady on Wednesday as portfolio adjustments before a debt sale the next day erased small gains made after Prime Minister Enrico Letta survived a confidence vote on the 2014 budget.
The late Tuesday vote was followed by a Senate decision on Wednesday to expel centre-right leader and former premier Silvio Berlusconi from parliament over a tax fraud conviction.
Berlusconi's party voted against the budget, formalising a break with the left-right coalition, although some rebels who broke away from the former premier this month backed Letta.
Some in the market said that, while Berlusconi's waning political influence was positive for Italian bonds, the Letta-led coalition could find it hard to push through tough reforms with a slimmer majority.
Letta said the government was in fact stronger and more cohesive after Berlusconi's exit.
Berlusconi spooked markets in 2011 with his reluctance to implement austerity measures and Italy's borrowing costs were trading at unsustainable levels of above 7 percent before he resigned later that year.
Italian 10-year yields ended the day flat at 4.07 percent , reversing an early fall to 4.05 percent as traders pushed for lower prices ahead of Thursday's sale of 2024 paper.
"There's a bit of concession building but if anything Berlusconi being voted out of the Senate will be seen as a positive development at the margin rather than negative," said Sunrise Brokers head of fixed income research Gianluca Ziglio.
"Nevertheless, the political and electoral backing of Letta's government is likely to be significantly weakened by the end of the grand coalition ... and this is unlikely to result in a diminished risk of political instability."
Italy's 10-year yield premium over German Bunds was stable at around 236 basis points as bets the European Central Bank might ease monetary policy further continued to support both highly rated and peripheral euro zone bonds.
Those expectations and Italy's reduced funding schedule are seen fuelling demand at Rome's sale of up to 2.5 billion euros of bonds maturing in 2024.
"The paper looks attractive enough, the market is still searching for yield," said Alan McQuaid, chief economist at Merrion Stockbrokers.
German Bund futures slipped 7 ticks to 141.63 while the 10-year cash yield was up 1.4 bps at 1.706 percent as equities held near record highs. A 3.6 billion euro sale of 10-year debt by Germany had earlier met solid demand.
The market took in its stride news that German Chancellor Angela Merkel's conservatives and the centre-left Social Democrats (SPD) had reached a deal to form a government, two months after Merkel's landslide election victory.
"Although the SPD's (pending) vote means a 'Grand Coalition' is not yet in the bag, ongoing progress toward this outcome is entirely in line with market expectations and so should also have little if any discernible near term impact," Rabobank strategists said in a note.
