UPDATE: Italian and Spanish bond yields fall as ECB signals buy up

The European Central Bank said last night it would "actively implement" its controversial bond-buying programme to fight the euro zone's debt crisis, signalling it will buy Spanish and Italian government bonds.

Italian and Spanish government bonds opened higher, reducing the additional yield investors demand to hold the securities instead of benchmark German bunds, after the European Central Bank signaled it may buy the securities.

The Governing Council of the European Central Bank (ECB) said it welcomed the announcements made by the governments of Italy and Spain on new measures and reforms in the areas of fiscal and structural policies, the Telegraph reports.

"It is on the basis of the above assessments that the ECB will actively implement its Securities Markets Programme.....and therefore to ensure price stability in the euro area" the ECB said in a statement,

The yield on 10-year Italian bonds fell 50 basis points to 5.59% as of 7:43am in London. That narrowed the difference in yield, or spread, to similar-maturity German debt by 66 basis points to 308 basis points. The yield on two-year Italian notes dropped 26 basis points to 4.26%.

The yield spread between Spanish and German 10-year bonds narrowed 70 basis points to 299 basis points as the yield on the Spanish securities dropped 56 basis points to 5.50%. The Spanish two-year note yield fell 53 basis points to 3.83%.

News of the deal came through just after 11pm last night. It is understood ECB President Jean-Claude Trichet wanted an agreement from ECB members to buy Italian paper before Asian markets opened.

G7 finance ministers were also expected to hold a conference call overnight.

The central bank was forced to step in after its refusal to enter the Italian and Spanish bond markets last week added to sovereign debt fears, which in turn helped fuel a sell-off that wiped $2.5trn (£1.5trn) off global stock markets.

Market watchers were already waiting with baited breath for Monday's opening bells to see the impact on stocks of Standard & Poor's decision over the weekend to strip the US of its AAA credit rating for the first time.

Despite the ECB's efforts, the first indications are its actions may be too little too late as Japan's main Nikkei 225 index fell 2.4%, while South Korea's Kospi lost 5%, Hong Kong's Hang Seng was down 4%, and Mumbai's Sensex slid 3%.