* Italy sells five and 10-year bonds
* Spanish yields rise, German yields hit record low
* Irish yield curve inverts before Thursday's referendum
LONDON, May 30 (Reuters) - Italian government bond yields broke above the 6 percent danger level on Wednesday as traders made room for fresh supply later in the day against a backdrop made difficult for riskier bonds by banking troubles in Spain.
Spanish yields also jumped as investors worried about the country's plans to raise new funds to recapitalise nationalised lender Bankia when the country's borrowing costs are rising daily.
Safe-haven German Bund futures hit a record high and 10-year German bond yields fell to an all-time low.
Domestic investors are expected to ensure sufficient demand for the Italian Treasury's offer of up to 6.25 billion euros of five- and 10-year bonds, but borrowing costs are set to rise .
"I think they will raise the necessary amount, the minimum amount, but it's just a question of what price it goes at," Credit Agricole strategist Orlando Green said.
Italian 10-year yields rose above 6 percent for the first time since mid-May, up 12 basis points on the day at 6.03 percent.
The Spanish equivalent gained 10 bps to 6.6 percent, drawing closer to 7 percent - a level beyond which funding costs are seen as unsustainable.
Spain will soon issue new bonds to fund ailing lenders and indebted regions, a move which is set to put further pressure on already stretched finances.
Analysts are concerned that Bankia could be the tip of the iceberg of an overleveraged banking system.
They worry that troubles related to weak banks and indebted regions could eventually force Spain - the euro zone's fourth largest economy - to seek an international bailout the region can ill afford.
European Central Bank policymaker Ewald Nowotny said on Tuesday that it was up to governments to rescue any banks that get into trouble, in a blow to those hoping the ECB would step in soon.. "The news flow in Spain continues to deteriorate quite quickly," a trader said. "They are getting to a stage where they can't fund themselves at a time when they are talking about having to do extra issuance to a) fund the banks and b) fund the regions."
Against this uncertain backdrop, investors took refuge in German government bonds even though they were becoming increasingly expensive.
German Bund futures rose to an all-time high of 144.62 and 10-year German bond yields hit a record low of 1.340 percent. Yields were last down 1.7 bps at 1.343 percent.
With two-year bonds offering hardly any returns and those on 10-year bonds falling, investors moved up the yield curve.
Thirty-year German bonds outperformed, with yields falling faster than those on other maturities, helping to flatten the curve. The yield was down 2.5 bps at 1.91 percent.
"1.20 (percent) in 10-year yields cannot be excluded. The situation is just so fragile, we have so many risks in Spain," Michael Leister, strategist at DZ Bank said.
"Our view has been ... that any sort of pullback here in Bunds you should see as a buying opportunity, and be long Bunds either outright or by a curve flattener."
Elsewhere, two-year Irish borrowing costs rose above 10-year bond yields for the first time since January.
The so-called inversion of the Irish yield curve, which can indicate that investors see greater risks to the repayment of bonds in short term, comes a day before the country's referendum on new EU fiscal rules.