Milan, April 29 - European markets rallied Monday, with Italy's FTSE MIB leading gainers as investors reacted positively amid signs a new government would end the political impasse that has paralyzed the country since inconclusive elections in February. Two debt auctions also left Italy paying yields not seen in over two years. In another sign of investor confidence in Italy, the spread between the country's 10-year debt and its German equivalent dropped to 270 basis points, compared with 290 basis points Friday. Italy auctioned off 3.0 billion euros in five-year bonds and 3.0 billion euros in 10-year bonds with the yield on the five-year debt down to 2.84% (from 3.65% at the last auction, on March 27) and the yield on the 10-year debt at 3.95%, down from 4.66% at the previous auction. The yields were the lowest Italy had seen since October 2010. The FTSE MIB closed up 2.2% at 16,929.68, powering ahead of Spain's IBEX 35, up 1.85% at 8,450.9 and France's CAC 40, which ended the day +1.54% at 3,868.68. Bourses in Germany and the UK also ended the day in positive territory, but marking up more modest gains: Frankfurt's DAX edged up o.75% to close at 7,873.5, while the FTSE 100 closed up 0.49% at 6,458.02. The Milan rally happened despite a downbeat report earlier Monday by the national statistics agency which showed that Italian manufacturing confidence dropped in April, a reversal of the positive trend seen in the previous three months. In terms of shares, gainers include Mediaset (the media company owned by former Premier Silvio Berlusconi's family), which notched up a +4.68% gain, utilities operator A2A, up 6.11%, Telecom Italia, up 3.7% and electricity grid operator Terna, up 3.7 percent. Bad news hit shares of Fiat, which reported a first quarter loss, as well as media company RCS, the publisher of Corriere della Sera, dragged down by a board meeting which agreed to a reduction in corporate capital after losses.