(REUTERS) - Italian one-year borrowing costs stayed close to a record high at an auction on Monday, in an early sign that last week's EU summit failed to reassure investors European leaders can take the urgent steps required to stem the Eurozone debt crisis.

The Dutch government in contrast paid a negative yield on Monday to sell 1.1 billion euros ($1.46 billion) of bills as investors continued to opt for top quality core Eurozone debt.

While traders said Italy drew good demand for its paper, reflecting appetite for short-term paper, demand was helped by banks agreeing to scrap fees for retail investors. The yield, at 5.952 percent, was not far below the euro lifetime record high of 6.087 percent hit at a sale a month ago.

This is still a high one-year rate at almost 6 percent, said Padhraic Garvey, a rate strategist at ING in Amsterdam. It's not a very pleasant set of circumstances for Italy and it's not sustainable.

Italy faces a more challenging test on Wednesday, when it is due to sell up to 3 billion euros of its five-year benchmark bond, which saw yields climb above seven percent on Monday..

The yield on Italian 10-year benchmark bonds rose steadily to over 6.8 percent on Monday.

Italian yields have been rising since European Central Bank President Mario Draghi dashed hopes last week that the ECB could ramp up its buying of sovereign bonds aggressively once a fiscal compact had been agreed at Friday's summit.

Sentiment has soured further as the summit's agreement on closer fiscal integration and measures to boost the Eurozone bailout fund were also seen as insufficient to tackle the debt crisis.

The gap between 10-year Italian BTP bonds and German Bunds jumped to 482 basis points on Monday, from 428 basis points late on Friday.

Rome raised the planned amount of 7 billion euro at Monday's debt sale, helped by bill redemptions worth 11 billion euros. The auction was covered 1.9 times, broadly in line with a smaller one-year debt sale last month.

The Dutch government meanwhile paid a negative 0.007 percent yield to sell 1.1 billion euros of bills maturing on March 30, 2012. Dutch yields are close to negative as investors look to preserve their cash in top-notch paper and avoid bank deposits.

The auction rate was 0.009 percent on 1.5 billion euros of bills due June 29, 2012.

France was also due to sell short-term debt later on Monday.

Analysts expect Wednesday's auction of Italy's five-year bond to go through, helped by its small size, but see yields rising further after hitting a euro lifetime record of 6.3 percent at a sale in mid-November.

Bank of Italy Governor Ignazio Visco said last week that Italian borrowing costs must fall in a sustained way to around five percent to ensure the Eurozone's third-largest economy can continue to manage its 1.9 trillion euro debt.

In a bid to avert financial disaster, Italy's emergency government approved a new 33 billion euro austerity package last week, which helped drive yields lower before Draghi dashed hopes for more aggressive ECB bond buying.

The question is will this help to stabilize sentiment?, WestLB strategist Michael Leister said, referring to Monday's Italian BOT auction.

I don't believe so, given that those comments from Draghi ruling out a bazooka during the ECB conference are still weighing on spreads.

Italian Prime Minister Mario Monti said on Sunday he regretted EU leaders hadn't agreed at the summit to boost the European bailout fund to more than 500 billion euros and urged Germany to consent to joint Eurozone debt issuance.

(Additional reporting by Milan and London bond teams; Editing by Gavin Jones and Susan Fenton)