EURO GOVT-Bunds fall on plans to safeguard euro zone banks

LONDON Oct 5 (Reuters) - Bunds opened lower on Wednesday following a strong three-day rally after European finance ministers agreed to safeguard euro zone banks from the region's spreading debt crisis, but losses were capped by an Italian ratings downgrade.

Doubts also remained over whether Greece will receive a vital aid tranche -- recently delayed until mid-November -- and markets faced nagging uncertainty over how much of a loss the private sector will have to take on its Greek debt holdings.

Underscoring the underlying problems faced by the euro zone, Moody's Investors Service cut Italy's credit ratings by three notches on Tuesday, citing a "material increase" in funding risks. .

The move was broadly expected after Standard & Poor's cut its rating on Italy last month, but traders said it acted as a reminder that markets should expect further rating downgrades of euro zone sovereigns.

Italian BTP futures FBTPc1 were 42 ticks lower at 100.20, although there was hardly any trading.

"It's still a mess out there," one trader said. "The Italy news has offset the bank recapitalisation talk. I don't see any reason why Bunds should dramatically sell off."

"The plan doesn't seem to have any details, it is still the early stages of talks and generally these things don't have anything other than a temporary impact."

At 0612 GMT, Bund futures FGBLc1 traded 27 ticks lower at 137.97, having gained about three points in the past three sessions. German 10-year yields were up 3.3 basis points at 1.754 percent.

Germany plans to sell up to 5 billion euros of September 2013 bonds later in the day.

"We recommend holders of July 13 (paper) to switch into the Sept. 13 to pick up 5 bp in yield," Commerzbank strategists said in a note.

Two-year Schatz notes yielded 0.463 percent, up 0.6 bps on the day. (Reporting by Marius Zaharia)