Banks in Italy and Spain increased their purchases of government debt in January, giving the firmest indication that they have channelled some of the 3-year loans taken from the ECB at the end of last year into sovereign bonds, ECB data showed.

The ECB handed banks almost half trillion euros in late December, and they have a second chance to get funds at similar terms this week. The use of those funds to buy government debt has become known as the Sarkozy trade after French President Nicolas Sarkozy urged banks to buy government debt.

The central bank data published on Monday indicated that, in addition to the strained countries, German banks also took advantage of higher returns government bonds offer.

Currently, banks pay 1.0 percent interest on the ECB money, compared with a roughly 3.6 percent yield they can earn by buying 5-year Spanish bonds. The yields have already come down from around 6.4 percent in late November.

Spanish banks increased their holdings of securities issued by euro zone governments by a record 23.1 billion euros, bringing the total they held in January to 229.6 billion, ECB data showed. The data does not break down banks' holdings by issuing country.

In Italy, the monthly rise in the value of government debt holdings was 20.6 billion euros month, also a record monthly increase, increasing the total to 280 billion euros.

Portuguese and Greek banks scaled down their government bond holdings slightly, while Irish and French and German banks increased theirs.

(Reporting by Sakari Suoninen and Marc Jones)