EURO GOVT-Spanish debt surges; Draghi comments seen in new light

* Spanish and Italian bonds rally

* Bunds give up all of their post-ECB gains

* Bunds fall as much as two points on the day

* Rajoy's comments spur Spanish bond surge

By Ana Nicolaci da Costa and Marius Zaharia

LONDON, Aug 3 (Reuters) - Spanish and Italian government bonds surged on Friday, as investors bought in anticipation of an eventual intervention by the European Central Bank to curb those countries' borrowing costs even though no action was expected for at least a month.

ECB President Mario Draghi on Thursday indicated the ECB may start buying government bonds again, but not before September, and only if countries asked to use the euro zone's rescue funds and accepted strict conditions and supervision.

Comments by Spanish Prime Minister Mariano Rajoy that he was ready to do what is best for Spain spurred speculation the country may be inching closer to asking for EU aid.

A source said separately that Spain would not decide whether to apply for several weeks.

"I think people have read that to suggest he may ask for a bailout," one trader said.

Ten-year Spanish government bond yields fell 30 basis points on the day but at 6.95 percent - yields were still close to levels considered unsustainable over the long-term. Ten-year Italian yields shed 27 bps to 6.06 percent.

The move was especially pronounced in the short-part of the yield curve, which is where Draghi said any intervention would be focused.

Two-year Spanish yields were 77 bps lower on the day at 3.77 percent, while equivalent Italian yields fell 59 bps to 3.20 percent.

"The front-end of the curve is very happy," said David Keeble, global head of fixed income strategy at Credit Agricole.

"People have slept on it and decided it's not so bad. If you strongly suspect the ECB is going to buy down there, you've got some protection."

On Thursday, Draghi's comments were considered disappointing after he backed bold comments made last week, that he would do what was necessary to preserve the euro only with promises of future action.

German Bunds slumped more than 2 points as better than expected U.S. data also gave investors an opportunity to take profits on lofty German prices.

U.S. employers in July hired the most workers in five months, but an increase in the jobless rate to 8.3 percent kept prospects of further monetary stimulus from the Federal Reserve on the table.

The Bund settled down 193 ticks on the day at 142.95 - its biggest daily fall since October 2011. A weekly loss of 0.3 percent was much smaller than last week's 1.8 percent fall.

Still, some analysts say the prospect of action only in September leaves peripheral markets vulnerable to volatility liquidity thinned by the summer holidays in Europe.

That could be favorable for the auction of 10-year German debt, the only in the euro zone next week, even though analysts say the results will very much depend on risk appetite that day.

"The ECB provided relief to peripheral markets but at the same time tensions there will have to intensify first before we get to a programme and the next policy response," Rainer Guntermann, strategist at Commerzbank said.

"Overall, there should be decent demand for this auction of German paper but ultimately the sentiment on the day will determine the results."

Germany is due to sell 4 billion euros of July 2022 bonds on Wednesday.