CORRECTED-UPDATE 1-Investors snap up safe-haven German two-yr debt

(Adds average yield in fifth paragraph)

By Kirsten Donovan

LONDON, June 20 (Reuters) - Investors snapped up 4 billion euros of German two-year government bonds at a sale on Wednesday, despite them bearing no interest, as they sought to preserve their capital in the euro zone's most liquid asset as the region's debt crisis deepens.

Strong demand for German debt, particularly shorter-dated issues, as a safe haven from a crisis now buffeting Spain and threatening to suck in Italy, has pushed yields to record lows across the curve. Two-year yields even briefly turned negative at the beginning of June.

As a result of the turbulence, investors have become more concerned with preserving their capital than with returns on it.

Investors bid for 1.9 times the amount of paper on offer, compared with an average of 1.86 percent at two-year auctions this year, according to Reuters data.

Average yields were 0.1 percent compared with an average of 0.19 percent so far this year, while the Bundesbank retained 19.9 percent of the issue compared with an average of 14.2 in other 2012 sales.

Although German debt has come under some pressure over the last week on concerns Berlin may have to foot most of the bill to keep the euro zone together, yields remain extremely low by historical standards.

"For all the talk of the potential impact of a crisis solution on the Bund curve it would seem there is still sufficient uncertainty to ensure a capital preservation bid trumps German debt's distinct lack of yield advantage," said Richard McGuire, a strategist at Rabobank.

The yield spread between German two- and 10-year bonds tightened to 147 bps from 148 just before the auction.

This week's big test for the euro zone bond market will be Spain's sale on Thursday of two-, three- and five-year bonds. (Writing by Emelia Sithole-Matarise, editing by Nigel Stephenson)