EURO GOVT-Bunds slip, unresolved debt crisis to limit falls

* Bunds slip ahead of German, French bond sales

* Lingering debt crisis to limit fall in safe-haven demand

* Next week's Italian, Spanish supply seen as flashpoint

By William James

LONDON, Jan 3 (Reuters) - German Bund futures edged lower on Tuesday but rising pressure on the region's lower-rated sovereigns tamed losses as investors looked ahead to the tough task Italy and Spain face to refinance their public debt.

Germany and France will hold 2012's first bond auctions this week with market participants pointing to the 13 billion euros of supply as a short-term factor weighing on top-rated bonds.

Bund futures were 12 ticks lower at 138.07 after rallying more than 5 points in December to within sight of November's record high of 139.58.

The drop added to losses in the previous session, but underlying demand for the relative safety and liquidity of German debt limited the fall as the region's debt problems continue to fuel low-risk investment strategies.

The real supply crunch begins next week with Spain and Italy -- the two countries at the forefront of concerns about the region's ability to escape its debt problems -- both due to issue bonds.

"Looking ahead it's going to be more interesting to see how the market handles Spain and Italy next week," said Eric Wand, strategist at Lloyds Bank in London.

"The market will be pushing on an open door a bit in terms of trying to get a concession on the upcoming supply given they know there's a wall of refinancing to come and the market hasn't got the backstop it was looking for."

Italy's borrowing costs, currently hovering near the 7 percent level, are a crucial gauge of sentiment with the country needing to refinance more than 100 billion euros of maturing bonds and interest payments in the first quarter of the year.

Italian 10-year bonds last yielded 6.94 percent, 2 basis points higher on the day.

Markets will be watching to see if banks use a huge 489 billion euro injection of three-year loans from the European Central Bank to buy Italian and other lower-rated debt, or continue to deposit the cash at the ECB and pay their own debts.

FRANCE, SPAIN TO UNDERPERFORM

Ahead of Thursday's bond auction, the French/German 10-year yield spread widened by as much as 7 basis points to 141 bps, reaching its widest since Dec. 8.

France's triple-A credit rating is seen as one of the most vulnerable among euro zone states and its bonds could suffer if rating agency Standard and Poor's follows through on its warning over the ratings of all the currency bloc's sovereign.

Similarly at risk of rising yields was Spain after it unveiled a larger-than-expected budget deficit, threatening to take the shine off the recent good performance of its bonds.

Spanish debt has outperformed Italian paper on the perception it poses less of a systemic risk to the currency bloc, and has less demanding refinancing needs in 2012. But a grim outlook for the country's public finances may see that outperformance reversed.

"You could argue that Spain's done too well, with talk of a deficit above 8 percent of GDP. We're looking to be short Spain from here," a trader said.

Ten-year Spanish bonds carried a yield 174 bps lower than their Italian equivalent, just off levels seen last week of nearly 200 basis points - the biggest yield gap between the two countries' bonds since the launch of the euro.

Spanish 10-year yields were 6.5 bps higher on the day at 5.2 percent.