* Market optimistic Portugal will regain investment status

* Fitch to review Portugal credit rating after Europe close

* Smaller DBRS to review Italy's rating

By Emelia Sithole-Matarise

LONDON, March 27 (Reuters) - Portuguese bond yields fell on Friday on expectations that credit ratings agency Fitch may upgrade the country back to investment grade after it successfully exited its international bailout last year.

Fitch will decide after the market close whether to upgrade Portugal from the current one notch into "junk" territory.

Analysts said some investors were already positioning for a potential positive outcome given the country's continuing economic recovery.

Portuguese 10-year yields were 5 basis points down at 1.75 percent while Spanish and Italian equivalents were 3-4 bps lower at 1.25 percent and 1.30 percent , respectively.

"We could see Portugal moved up to investment grade later today and that could produce a bit of forced buying from index trackers or some accounts may have to up their Portugal exposure. That could also help the peripheral in general," said Commerzbank strategist Rainer Guntermann.

Standard & Poor's upgraded its Portugal credit outlook to positive from stable last week, citing better growth prospects, but left its rating two notches below investment grade at the lowest level among the leading raters.

Guntermann said the market may also be supported by the prospect that up to 60 billion euros - similar to the ECB's monthly asset purchase target - in coupon payments and bond redemptions due over the coming month could be ploughed back into the market, giving fresh impetus to its rally.

Italy's ratings are also under scrutiny with smaller agency DBRS due to deliver its review later on Friday. The Toronto-based ratings agency said two weeks ago that the country's political situation seemed to have stabilised and it was making progress with structural reforms.

Giacomo Barisone, the head of DBRS's Italy desk, told Reuters that Italy's ratings will be supported by the ECB's government bond-buying programme.

That cautiously upbeat assessment reduced the risk that it could become more expensive for Italian banks to use the country's sovereign bonds as collateral to obtain financing from the ECB. This is because DBRS, which rates Italy's sovereign debt A low with a negative trend, is the only one of the four international ratings agencies which gives Rome an A rating.

(Editing by Tom Heneghan)