AFP - Spain's borrowing costs plummeted Tuesday as investor demand surged at an auction of short- and medium-term debt despite a Spanish sovereign debt downgrade.

Spain raised 4.88 billion euros ($6.2 billion) in the sale, easily meeting its target of 4.0-5.0 billion euros as investors showed a renewed appetite for risk.

Demand outstripped supply by more than three times, with bids amounting to a total 16.7 billion euros.

It was good news for Spain, which was able to lock in borrowing rates at nearly half the cost of a comparable sale five weeks earlier despite a Standard & Poor's rating downgrade.

Spain's borrowing rates plunged to 2.049 percent from 4.050 percent for the 12-month bills sold and to 2.399 percent from 4.226 percent for 18-month debt, Bank of Spain figures showed.

Demand for big returns from eurozone sovereign bonds has soared since the European Central Bank last month extended low-interest, three-year loans of nearly half a trillion euros to banks in the region.

Thanks to the ECB financing operation, "the Spanish government is now having no trouble selling T-bills, or even bonds up to a three- or four-year term," independent Barcelona-based economist Edward Hugh said online.

It was Madrid's first debt auction since Standard & Poor's Friday downgraded nine European nations' credit ratings, including slashing Spain's by two notches to A from AA minus.

Spain's new right-leaning Popular Party government, which took power last month after beating the Socialists in November 20 elections, is battling to regain the confidence of the markets.

Prime Minister Mariano Rajoy has said Spain's public deficit will amount to the equivalent of about 8.0 percent of gross domestic product in 2011, missing the 6.0-percent target by a wide margin.

But he has vowed to meet the 2012 goal of reducing the deficit to 4.4 percent of GDP, even if that means he must find a way to lop an estimated 40 billion euros off the budget.

Already Rajoy's government has announced 8.9 billion euros in budget cuts, tax increases to bring in 6.28 billion euros and an anti-tax fraud battle to recoup another 8.17 billion euros.

The Spanish leader held talks with French President Nicolas Sarkozy in Madrid on Monday, after which both leaders played down the impact of the S&P downgrades which also cost France its prized top triple-AAA status.

Rajoy was meeting Tuesday with European Union president Herman Van Rompuy, who is travelling around the eurozone this week for talks with leaders aimed at tackling the eurozone debt crisis.

European leaders are due to meet on January 30 to discuss a new fiscal pact to coordinate deficit reduction programmes and attempt to reassure the bond markets that they are on top of the sovereign debt crisis.

Spain's premier said at the weekend that his country, which suffered a towering 21.5-percent unemployment rate in the third quarter of 2011, now had an "astronomical" figure of 5.4 million jobless.

"The government I lead knows perfectly well what must be done to improve Spain's reputation and to create growth and jobs, and we are going to do it," he added.

"We also know what must be done in Europe, for this is not only our problem."