Spain and France enjoyed a blast of positive investor sentiment on Thursday with borrowing costs falling at debt auctions stoked by cheap cash from Europe's central bank.

The sale of 4.6 billion euros in Spanish debt meant Madrid is now way ahead of what it had planned to issue this year. Around 25 percent of the total is already accounted for.

Similarly, France sold almost 8 billion euros in longer-term bonds, again at reduced yields, adding to signs that pressure is easing on some of the euro zone governments struggling in the debt crisis.

France's sales this year now account for around 15 percent of what it has said it needs in 2012.

Spain has stepped sharply back from the borrowing danger zone since November when it had to pay an unsustainable 7 percent interest to place 10-year bonds.

It is now paying around 5.5 percent on similar bonds and is no longer mentioned in the same breath with countries such as Greece and Portugal, who had to get bailed out by the European Union.

Analysts, however, cautioned that investor demand for Spanish bonds was even stronger at auctions in December and January than at Thursday's sale, and prices on the country's debt fell right after the sale, indicating the party could be over.

And although the financial crisis has eased, Spain is now sliding into its second recession in four years and the government is forcing through painful austerity measures that are only exacerbating a sky-high jobless rate of 23 percent.

That means Spain may end up issuing more bonds than it planned this year, which could bring tension back to its bond auctions.

The impressive performance of Spanish paper comes amid a deterioration in the country's economic fundamentals and a slide back into recession. This is undermining the credibility of Spanish fiscal policy and may lead to higher-than-expected bond issuance later this year, said Nicholas Spiro at consultancy Spiro Sovereign Strategy.

He said the International Monetary Fund believed Spain is unlikely to trim its deficit to less than 6.8 percent of gross domestic product in 2012, which would force the Treasury to up its borrowing requirements later this year.

DEBT AHEAD OF SCHEDULE

In just over a month, Spain's Treasury has completed almost a quarter of planned debt issuance for 2012, taking advantage of yields driven lower by the European Central Bank's injection of almost half a trillion euros of low interest, three-year loans into banks in December.

The 4.6 billion euros on Thursday were just above the top end of its target. Yields ranged from 2.861 percent on 3-year bonds to 3.455 percent on four year paper.

The benchmark five-year note was placed at an average yield of 3.565 percent, down from 5.544 when it was last sold on December 1.

Yields also fell at France's first auction of long-term fixed-rate bonds since losing its triple-A credit rating last month and after the government cut its forecast for growth this year to 0.5 percent from 1.0 percent.

Those for 10-year bonds fell to 3.13 percent from 3.29 percent on January 5. Yields for bonds maturing in 2018 and 2020 were 2.44 percent 2.91 percent respectively.

This is in line with euro zone debt yields in general. They fell steadily in January, boosted by hopes that policymakers were getting some traction in efforts to see off the crisis and by largesse from the European Central Bank.

A broad deal on restructuring Greece's debt, hoped for by next week, would add to that mood and further relieve pressure on Spain and Italy.

Alberto Marino, head of government bonds at BBVA bank, said market support should continue for Spain's debt given another three-year sale from the ECB this month which will again boost banks' cash position.

It's a strong auction and the Treasury has sold at the top end of its target. The sales show continued appetite for Spanish debt and the ECB support is key here even if not the only driver behind support, he said.

Spain's tough deficit reduction plan and reform work from the new government is also keeping investors interested.

Spain's prime minister, Mariano Rajoy, who took office in December, implemented a series of tax hikes and spending cuts worth around 15 billion euros as a first step to deflating a public deficit from the around 8 percent of gross domestic product it hit at the end of last year.

This week he moves forward with a financial sector reform to try to restore confidence to the country's banks and next week he will decree labour market reforms to try to make it easier for companies to hire and fire.

That is in contrast to neighbouring Portugal, which has been lined up as the next Greece by investors who suspect it will eventually need a second international bailout or debt restructuring and for that reason its issues are not seen to have benefited from ECB liquidity measures.

(Reporting by Nigel Davies; Editing by Fiona Ortiz/Patrick Graham/Jeremy Gaunt)