By Dhara Ranasinghe

LONDON (Reuters) -Relief swept over battered euro zone bond markets on Wednesday as the European Central Bank said it would skew reinvestments of maturing debt to help more indebted members and will devise a new instrument to stop excessive widening of yield spreads.

Just this month alone, Italian 10-year bond yields have soared almost 100 basis points (bps). Spanish, Portuguese and Greek bond yields have jumped around 80 bps each, hurt by expectations for a series of rate hikes and the absence of a concrete plan from policymakers to limit rising borrowing costs.

For now, signs of an ECB plan taking shape bolstered bond markets which had already rallied on news that a rare, unscheduled meeting would take place on Wednesday.

“Flexible PEPP reinvestments now, and tasking the relevant committees to design a new anti-fragmentation tool, that’s what markets needed to hear, finally!,” Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management, tweeted.

Italy’s 10-year bond yield fell as much as 47 basis points. By 1510 GMT, it was down 39 bps at 3.880% and set for its biggest one-day fall since March 2020.

“The ECB has really heavy firepower. I don’t think those who covered their shorts today want to go short again because they would hurt themselves,” said Carlo Franchini, head of institutional clients at Banca Ifigest in Milan.

“It’s an unprecedented breath of fresh air for the BTP. It’s not a whatever it takes moment but were are close,” he added.

Greek 10-year bond yields slid 40 bps to 4.257% and Spanish and Portuguese 10-year yields slid around 26 bps each..

Germany’s 10-year yield, the benchmark for the bloc, was last down almost 12 bps 1.632%.. The gap between Italian and German 10-year yields – a gauge of financial stability in the euro area – narrowed to 223 bps from an over 2-year peak of 252.9 hit on Tuesday.

The euro meanwhile trimmed gains and was last flat on the day at $1.0409. It was up 0.3% before the statement.

Euro zone shares rallied and were last up 1.8%.

Italian bank stocks rose 4.8%, having risen as much as 6.6% in morning trade. Euro zone banks also trimmed gains.

“Last week we only heard one side of the story from the ECB about what they will do on rate hikes, but not what they would do about fragmentation risks. Obviously they are now trying to rectify this,” said Marchel Alexandrovich, European economist at Saltmarsh Economics.

Focus meanwhile was expected to turn later in the session to the U.S. Federal Reserve, which could deliver a hefty 75 basis point interest rate hike to tame inflation.

(Reporting by Dhara Ranasinghe; additional reporting by Danilo Masoni; editing by Saikat Chatterjee, William Maclean)