(Updates prices, adds move in German bonds)
By Yoruk Bahceli and Dhara Ranasinghe
LONDON, March 19 (Reuters) - Southern Europe's borrowing costs tumbled on Thursday after the European Central Bank stepped in with emergency stimulus measures to calm markets in the face of the coronavirus outbreak.
The ECB launched a 750-billion-euro emergency bond purchase scheme to try to stop a pandemic-induced financial rout from shredding the euro zone's economy and raising new concerns about the currency bloc's viability.
The new purchases bring this year's planned purchases to 1.1 trillion euros. The new purchases alone are worth 6% of the euro area’s GDP.
Italy, whose borrowing costs have spiked in recent days, saw its two-year yield slump as much as 100 basis points at one point. It was last down 66 bps on the day at 0.79%, set for its biggest one-day fall since mid-2018 .
Ten-year Italian bonds yields were down 45 bps to 1.85% , and set for their biggest daily drop since 2011.
The risk premium on Italian bonds - the gap over safer German 10-year Bund yields - tightened almost 100 bps from Wednesday's close to around 169 bps before widening back to 200 bps. It was last heading for its biggest daily decline since June 2018.
"It's a larger bazooka than they may have needed if last Thursday hadn't panned out so bad," said Peter Chatwell, head of rates strategy at Mizuho.
Southern European bonds took a hit after ECB President Christine Lagarde said last week it was not the ECB's job to "close" spreads. A series of clarifications followed but did not calm the markets.
On Wednesday, Italian yields surged, with 10-year yields rising above 3%. Worries emerged over whether Italy's debt can be sustained, since the government, already heavily indebted, will need to spend large sums to deal with coronavirus.
ECB purchases will also for the first time include debt from Greece, which had been shut out because of its junk ratings. Now, around 12 billion euros in Greek government debt will be eligible for the purchases, according to Greece's finance minister.
Greek 10-year yields, which had shot up nearly 300 bps over the last two weeks, fell by nearly 190 bps to 2.06%, set for their best day since July 2015.
The risk premium over German government bonds fell 176 bps to 220 bps, down from over one-year highs near 400 bps on Wednesday.
Spanish and Portuguese 10-year bond yields slid over 30 bps each. The premium they pay above German bonds also fell the most since 2018 and Spain's fell back below 100 bps.
Germany's 10-year bond yield, reversed early falls and was last trading 4 bps higher on the day at -0.20%. It touched a two-month high at -0.14%.
That came as an official familiar with the plan said Germany intends to declare an exception to the debt brake enshrined in the constitution during a meeting on Monday to finance fiscal stimulus measures in the fight against coronavirus.
"The news that the German government plans to seek approval for unlimited borrowing would be consistent with higher yields even under normal circumstances," said Chris Scicluna, head of economic research at Daiwa Capital Markets.
"But there is a lot of market dysfunction right now and forced selling of more illiquid bonds, peculiarities."
Meanwhile, German manufacturers recorded the biggest drop in business expectations in the 70-year history of industrial surveys.
Reporting by Yoruk Bahceli and Dhara Ranasinghe; editing by Larry King and Timothy Heritage