* Initial relief after Letta survives confidence vote wanes
* Yields edge up as some investors over reduced governing majority
* ECB's ultra-easy policy tempers rise in yields, supports Bunds
By Emelia Sithole-Matarise
LONDON, Nov 27 (Reuters) - Italian bonds fell slightly in value on Wednesday as portfolio adjustments before a debt sale on Thursday reversed small gains made after Prime Minister Enrico Letta survived a confidence vote on the 2014 budget.
The vote late on Tuesday came before the Senate vote is expected to ban centre-right leader Silvio Berlusconi from parliament over a tax fraud conviction.
Berlusconi's party voted against the budget, formalising a break with the left-right coalition, although some rebels who broke away from the former premier this month backed Letta.
Some in the market said that, while Berlusconi's waning political influence was positive for Italian bonds, the Letta-led coalition could find it hard to push through tough electoral reforms with a slimmer majority.
Italian 10-year yields were 2 basis point up on the day at 4.08 percent as traders pushed for lower prices ahead of Thursday's sale of 2024 paper.
"There's a bit of concession building but if anything Berlusconi being voted out of the Senate will be seen as a positive development at the margin rather than negative," said Sunrise Brokers head of fixed income research Gianluca Ziglio.
"Nevertheless, the political and electoral backing of Letta's government is likely to be significantly weakened by the end of the grand coalition ... and this is unlikely to result in a diminished risk of political instability."
Italy's 10-year yield premium over German Bunds was stable at around 236 basis points as bets the European Central Bank might ease monetary policy further continued to support both highly rated and peripheral euro zone bonds.
Those expectations and Italy's reduced funding schedule are seen fuelling demand at Rome's sale of up to 2.5 billion euros of bonds maturing in 2024.
"Italian spreads still seem to be on a downtrend but taking a broader look at the periphery as a whole the spread tightening we've seen seems to have stagnated over the past weeks," said Marius Daheim, chief strategist at Bayerische Landesbank.
German Bund futures slipped 12 ticks to 141.58 while the 10-year cash yield was up 1.4 bps at 1.69 percent as equities held near record highs. A 3.6 billion euro sale of 10-year debt by Germany had earlier met solid demand.
The market took in its stride news that German Chancellor Angela Merkel's conservatives and the centre-left Social Democrats (SPD) had reached a deal to form a government, two months after Merkel's landslide election victory.
"Although the SPD's (pending) vote means a 'Grand Coalition' is not yet in the bag, ongoing progress toward this outcome is entirely in line with market expectations and so should also have little if any discernible near term impact," Rabobank strategists said in a note.