Italy paid a euro-era high price to sell five-year bonds on Monday, with investors wary of buying its debt until the country's new leadership undertakes profound economic reform.

The 3 billion euro (2.5 billion pound) sale, small by Italian standards, met slightly improved demand compared with a month ago, but the 6.29 percent cost of borrowing was seen as unsustainable as Italy tries to refinance its 1.9 trillion euro debt.

However, the yield was below secondary market levels, reflecting expectations of a more reform-friendly Italy after European Commissioner Mario Monti was asked to form a government on Sunday.

(Monti) is perceived to be a positive change for the country, said Annalisa Piazza, rate strategist at Newedge.

Cautiousness on the future developments in Italy is fully justified. Credibility has been lost and it will take a while for market participants to believe that the country is back on the right track.

Italian yields soared above 7 percent last week -- levels that ultimately led Greece, Portugal and Ireland to seek international aid.

Yet Italy is too big to be bailed out with currently available resources and preventing it becoming the next victim of the two-year old euro zone debt crisis is seen as crucial to future of the single currency itself.

Bids at Monday's auction were 1.469 times the amount on offer, compared with 1.344 percent at last month's sale, when gross yields were just 5.32 percent.

(The results) just basically tell us in the short term that we are not (spiralling) out of control, said Marc Ostwald, strategist at Monument Securities in London.

But in the long run, paying 6.29 percent for five-year paper is just not an option, it's not sustainable over the long term. You would need to be back below 5 (percent) before we get there and that looks very far away still.

Yields on benchmark Italian 10-year bonds climbed to 14-year highs of around 7.5 percent last week before Prime Minister Silvio Berlusconi, seen by many in the market as an obstacle in the way of reforms, said he would resign.

The political change -- and European Central Bank debt purchases -- pushed yields back to 6.40 percent early on Monday, but the improved sentiment seemed fragile -- yields last stood at 6.64 percent, up 14 bps on the day.

We've seen a substantial move in yields over the past few days and the 6.40 percent level, where the first (ECB) intervention took place, is a big one, and people have started to book some profits at around that level, one trader said.

Five-year yields stood close to 10-year levels at 6.63 percent.

(Graphics by Scott Barber, Vincent Flasseur and Valentina Za, additional reporting by Valentina Za, editing by Nigel Stephenson)