By Dhara Ranasinghe LONDON, Oct 26 (Reuters) - Portuguese government bond yields trimmed earlier rises on Wednesday, outperforming euro zone peers following firm demand at the country's first debt sale since passing a key ratings test at the end of last week. Yields were 5-6 basis points higher across the euro area, as a sell-off in Britain's bond market spilled over into the bloc. But Portugal's bond yields trimmed their rises following a 1 billion euro sale of five-year bonds. The country's five-year borrowing costs fell at the auction to 1.751 percent from 1.87 percent at the previous sale, after the country last week retained its only investment-grade rating, soothing market fears that it may lose the eligibility for the European Central Bank's bond purchases. Rating agency DBRS on Friday maintained Portugal's credit rating at the lowest investment grade level with a stable outlook after months of market speculation that it could downgrade the slow-growing, heavily indebted economy. "The bond sale shows that Portugal can continue to fund itself and that it can continue to benefit from the ECB's QE programme," said Martin Van Vliet, senior rates strategist at ING. With the crucial ratings review out of the way, remaining bond sales for the year were expected to go smoothly. The country is expected to sell a further 1 billion euros worth of debt by the end of the year. Analysts caution that Portugal's bond market is vulnerable to changes in risk appetite, while a weak economy and banking sector remain headwinds. "Nevertheless, if you look at the fundamentals, nothing has changed really since last Friday. The fiscal situation is still dire, growth is sluggish," said DZ Bank strategist Christian Lenk. Portugal's economy is expected to grow about 1 percent this year, far below initial expectations, and many economists think it will not rise much above that next year, causing concern as Portugal's public debt is near 130 percent of GDP, one of the highest in the euro zone. Portugal's 10-year bond yield was trading at 3.21 percent , up 1 basis point on the day and outperforming other euro zone bond yields. It held above a six-week low hit on Monday at around 3.05 percent as investors reacted to the DBRS review. Germany meanwhile sold almost 2.4 billion euros of five-year Bobl notes, while two-year bond yields in Greece fell to 5.54 percent - their lowest level since at least early 2015.

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