* European shares rebound after sell off
* German debt in demand ahead of Italy bond sale
* Euro vulnerable but off seven-week lows
By Marc Jones
LONDON, Feb 27 (Reuters) - Reassurance from the U.S. Federal
Reserve about its stimulus programme helped stabilise the euro
and European shares on Wednesday, as Italy prepared to test the
reaction to its inconclusive election in the bond market.
Italy will auction up to 6.5 billion euros of new 5- and
10-year bonds at around 1000 GMT after gridlocked elections
reignited fears about the euro zone debt crisis.
"Markets have started to price in risks of ungovernability
of the country in the coming months, with possible domino
effects on the rest of the euro area," said Newedge economist
"Political instability is expected to prevail ...and even a
grand coalition government would be seen only as a temporary
option, probably not able to continue the so-much needed reforms
Having fallen sharply on Tuesday following the Italian
stalemate, European shares rebounded 0.4 percent as
trading resumed with 0.8 percent rises in Milan's FTSE MIB
and Spain's IBEX the leading the gains.
The mood was helped after Federal Reserve Chairman Ben
Bernanke defended the U.S. central bank's monetary stimulus on
Tuesday, easing financial market worries over a possible early
retreat from bond purchases.
The euro also regained ground, rising 0.2 percent to
$1.3085 having hit a seven-week low of $1.3017 on Tuesday.
In the bond market Italian yields, which rise as prices
fall, inched up again, while German government bonds,
a favourite of risk-adverse investors, also added to this week's
"Italy remains the centre of attention and I can't see it
getting any better," one trader said. "Supply will be the main
focus and ... it could be a bit of a problem."