* Italian 10-yr yields drop to 0.67%, lowest since April

* ECB to meet for first time since policy tweak

* Market expects extended period of stimulus (Adds background, quotes, updates prices)

LONDON, July 22 (Reuters) – Italian borrowing costs sunk to their lowest in over three months on Thursday ahead of a European Central Bank meeting where its chief Christine Lagarde is expected to elaborate on a new target widely perceived as having dovish implications.

The ECB will meet for the first time since it unveiled a tweaked inflation target earlier this month and is all but certain to promise an even longer period of stimulus to make good on its commitment to boost inflation.

Lower-rated euro zone bond yields were broadly lower in morning trade as investors positioned for that.

“The July meeting was never expected to matter much, but following the strategy review could turn out to be a decisive milestone,” analysts at RBC said in a note.

They said they expected policymakers would use this opportunity to steer markets towards an even longer period of low rates than currently priced in.

Italy’s 10-year bond yield dropped two basis points to 0.6708%, the lowest since early April, and other southern European benchmark bond yields were also down 1-2 basis points on the day.,,

The ECB’s recent statement that it believes any further cut in interest rates would not be beneficial given their already low levels has led investors to conclude that the focus will shift even further to bond purchases.

Italy, as one of the lowest-rated countries in the single currency bloc and one of the biggest sovereign borrowers in the world, is seen as the biggest beneficiary of such a shift.

The closely-watched spread between Italian yields and German Bunds – the euro zone’s benchmark – stood at 106 basis points on Thursday; still a distance from July’s low of 98.72 bps.

An improvement in risk sentiment has also helped lower-rated bonds, with Asian stocks gaining in early trade after a rebound in Wall Street overnight, with the anticipation of fiscal and monetary stimulus countering worries about the spread of the Delta variant of COVID-19.

Reporting by Abhinav Ramnarayan, editing by Karin Strohecker and Tomasz Janowski

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