LONDON, June 15 (Reuters) - Italy led a sharp fall in euro-area bond yields and the euro rallied on Wednesday as news the European Central Bank will hold a unscheduled meeting to discuss a rout in government bonds raised hopes a plan of action may be taking shape.

Just this month alone, Italian 10-year bond yields have soared almost 100 basis points (bps). Spanish, Portuguese and Greek bond yields have jumped around 80 bps each.

Borrowing costs across the bloc, including top-rated Germany have soared to multi-year highs this week, hit by expectations of an aggressive 75 bps U.S. rate hike later on Wednesday and concern about the lack of an ECB plan to contain bond market strain.

"It would be surprising if they come up with a new tool today," said Nordea chief analyst Jan von Gerich.

Still, news of the ECB meeting came as relief for battered bond markets.

In debt-laden Italy, 10-year bond yields slid 22 bps to 4% , below Wednesday's eight-year highs. They were set for their biggest daily fall since March 1.

Two-year bond yields tumbled 23 bps on the day to 1.83%.

The euro also benefited, rising almost 0.6% to $1.047 , up from a one-month low hit earlier this week. It hit a 16-month high against Britain's pound at 87.20 pence .

European shares rallied and the euro zone banks index strengthened 3.5% after touching earlier this week its lowest level since March.

Italian banks, big holders of domestic debt, were last up 5%. They too have taken a beating this week as bond yields soared.

OPTIONS?

Options open to the ECB to fight so-called fragmentation risk - when some countries face markedly higher borrowing costs than others in the same currency bloc - include channeling reinvestments from maturing bonds into markets experiencing stress or devising a new instrument.

"My base line is that PEPP reinvestments won't be enough and that a new tool will be needed perhaps later this year to support weaker markets," said von Gerich, referring to the ECB's pandemic-era emergency bond buying scheme.

ECB board member Isabel Schnabel said on Tuesday the ECB was ready to deploy both existing and new tools if it found the market repricing was "disorderly".

"We should get a statement along the lines reflecting a willingness to act and then maybe they will also task committees to work on options, this is what was missing from last week," said Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management.

Spanish and Portuguese bond yields fell around 13 bps each, while Greek yields tumbled 25 bps to 4.4% in their biggest daily fall since March 2020.

German bond yields also fell, but the moves were modest, perhaps reflecting some caution ahead of the Fed decision, another key event for markets.

They had earlier touched eight-year highs at around 1.77% .

"I think the Fed will hike by 75bps," said Chris Huddleston, CEO at brokerage FXD Capital in London. "That will have an impact, anything less would be a half baked effort to contain inflation."

(Reporting by Dhara Ranasinghe Additional reporting by Samuel Indyk and Joice Alves and Sujata Rao Editing by Saikat Chatterjee and Mark Potter)