(Repeats item that ran on Monday, no changes to text)
By Dhara Ranasinghe and Ritvik Carvalho
LONDON, Sept 23 (Reuters) - The risk of the euro zone breaking up, which preyed on investors' minds in 2018, has fallen to the lowest level in over a year, market gauges show, as Italy's new government allays fears of "Quitaly", the possibility of Rome exiting the single currency bloc.
Italian bond yields have slid to record lows below 1%, galvanised by the formation of a new coalition government comprising the 5-Star Movement and the pro-European Democratic Party.
With the League - a party with a strong eurosceptic element - now out of government, the risk of Italy leaving the euro zone has tumbled.
"All that matters ultimately for Italian government bonds is whether Italy leaves the euro (or the euro zone breaks up)," said Mike Riddell, head of UK fixed income at Allianz Global Investors.
"The Italian government is arguably now the most market friendly in its history, and we therefore see a negligible risk of Italy wanting to leave the euro (or a euro zone breakup) over the next 12 months."
Euro break-up risk has been a key driver of Italian bonds in recent years, and the easing of such risks boosts the appeal of one of the few positive-yielding debt markets in the bloc.
Indicators closely tracked by analysts support this view:
DOLLAR
1/ Take the performance of Italian bonds denominated in dollars versus those issued in euros.
The yield on a 15-year euro-denominated Italian bond, or BTP, hit a record low in early September, while the yield on a similar maturity bond denominated in dollars is near seven-week highs.
Investors believe dollar bonds, governed by New York law, would offer stronger protection against debt restructuring, including currency redenomination, than the euro issues governed by Italian law.
So, whenever concern over Italy arises, dollar-denominated BTPs outperform their euro peers.
That happened after the 2016 Brexit vote in Britain, in 2017 when anti-euro far-right French presidential candidate Marine Le Pen surged in opinion polls ahead of elections, and last year when Italy's government quarrelled with the EU over spending policy.
While the dollar bonds' recent underperformance is down partly to speculation of a new dollar issue, investors said the removal of "Quitaly" risks was crucial, especially as other indicators too suggest a reduced risk of Italy exiting the euro.
2/ LINKERS
For most of last year, Italian bonds linked to local inflation performed better than those linked to euro zone inflation - the view was a return to the lira would result in significant currency devaluation, and subsequently, higher inflation.