EURO GOVT-Bunds slump as shares rebound, Italian vote eyed

* Bunds fall as equities rally from recent lows

* Ten-year German bond yields not far from record lows

* Italy to vote on austerity

By Ana Nicolaci da Costa

LONDON, Sept 7 (Reuters) - German government bonds slumped on Wednesday, as equity markets rebounded, with investors finding some relief from a court ruling that allows Germany to keep helping euro zone weaklings and from the prospect of austerity measures in Italy.

Germany's top court rejected a series of lawsuits aimed at blocking the participation of Europe's biggest economy in emergency loan packages but it handed the country's parliament greater say over euro zone bailouts.

Italy's centre-right government promised on Tuesday to hike value-added tax and a confidence vote should see the package passed in the Senate later on Wednesday. .

The rebound in equity markets helped German government bond yields rise but yields were not too far from recent record lows as uncertainty about how to resolve the euro zone debt crisis and how to revive a sluggish U.S. economy remained.

"Everyone is slightly holding their breath at the moment because so much is still up in the air," said Rabobank rate strategist Lyn Graham-Taylor.

Greece's finance minister pledged to speed up delayed privatisations and structural reforms, following the suspension of talks with its lenders. .

But the head of the European Financial Stability Facility (EFSF) said Greece's IMF/EU programme was not working, it would not be able to return to markets as planned and its citizens may have to accept a decline in living standards.

Meanwhile, a row over collateral for Greek bailout loans remained unresolved and increased powers for the euro zone's rescue fund have yet to be ratified by national parliaments.

Ten-year German government bond yields rose 6.9 basis points to 1.88 percent but were not far off record lows hit in the previous session at 1.792 percent.

German Bund futures FGBLc1 fell 81 ticks to a settlement close of 137.80. It hit a record high of 138.86 on Tuesday.

Italian yields fell and traders said the ECB was buying small amounts of those bonds in the secondary market. Ten-year Italian yields eased 13.6 basis points to 5.26 percent in after-hour trading.

ECB WATCH

Investors will be scouring an ECB press conference at 1230 GMT on Thursday for any guidance on a bond-purchasing program. .

The ECB has been buying Italian and Spanish bonds on a regular basis to keep yields at affordable levels, but there were concerns in the market that the central bank could ease off such purchases if Italy failed to carry out austerity measures.

Last Friday, ECB President Trichet verbally stepped up ECB pressure on Italy to deliver on its promised reforms to cut its deficit -- a line he is likely to stick to this week.

The ECB is also expected to halt its monetary tightening cycle just two months after hiking rates for the second time in 2011.

Interest rate futures have been increasingly pricing in an outside chance of a rate cut this year from 1.5 percent currently, as the euro zone debt crisis shows no sign of letting up as the outlook for the global economy remains bleak.

"They will basically signal that the tightening cycle is on hold, but I think they will disappoint expectations that they are going to cut rates any time soon," Nick Stamenkovic, strategist at RIA Capital Markets said.

U.S. President Barack Obama's address to Congress on Thursday to propose a series of measures to bolster the economy and create jobs will also be in focus. A weak non-farm payrolls number last week increased fears the world's largest economy could fall back into recession. (Additional Reporting by Kirsten Donovan; editing by Ron Askew)