Portugal has collected €1.75 billion in a debt auction, with a sharp drop in interest rates providing further evidence that market confidence in the bailed-out country is returning.

Investors stopped buying Portugal's debt in 2011 amid a broader crisis in the 17-nation euro zone.

That forced the country to seek a €78 billion international rescue and since then it has pursued an austerity programme to shed its heavy debt burden.

The Portuguese debt agency said it paid an interest rate of 1.23% on 12-month Treasury bills today, down from 1.39% last month, raising €1.25 billion. Demand was more than double the amount on offer.

It also raised €500m in six-month bills, paying a rate of 0.81% compared with 2.169% last November.