Italian short-term debt costs halved at auction on Wednesday as a new austerity package and cheap long-term liquidity from the European Central Bank won Rome some respite in thin year-end markets.

But analysts warned markets tensions could easily reignite and pointed to a new test on Thursday, when Italy will sell up to 8.5 billion euros (7.1 billion pounds) of longer-term bonds, including three- and ten-year paper.

On Wednesday, Italy sold 9 billion euros of six-month BOT bills at an average rate of 3.25 percent, down from a euro lifetime record of 6.50 percent at an auction last month.

Demand totalled 1.69 times the amount on offer, versus a bid-to-cover ratio of around 1.5 at the end of November.

This is the first Italian debt sale since the ECB provided 490 billion euros in cheap three-year loans to euro zone banks on December 21 in an unprecedented move aimed at easing credit strains.

In the run-up to Christmas, Italy's parliament gave the final seal to an emergency austerity budget rushed through by a new technocrat government to restore market confidence.

(Reporting by Valentina Za)