* Spanish, Italian bonds hit by profit-taking
* Markets undecided whether ECB intervention will work
* Uncertainty to remain high at least until September
By Marius Zaharia
LONDON, Aug 7 (Reuters) - Spanish and Italian short-term government bond yields rose on Tuesday, as caution took over after a recent strong rally fuelled by prospects of the European Central Bank resuming buying of the two countries' debt.
The ECB said last week it may resume purchasing bonds if troubled countries activated the euro zone's rescue funds and accepted strict conditions and supervision. This provided some relief for peripheral markets in the past few days.
But investors did not seem fully convinced ECB intervention would succeed in insulating Spain and Italy from any escalation of the debt crisis and worries remained over the conditions that had to be met before the ECB could step in.
The ESM bailout fund, which the ECB wants countries to tap before it buys their bonds, is not yet functional as the German Constitutional Court is due to rule on it on Sept 12. Some analysts also wondered how strong ECB interventions would be as past attempts to cap borrowing costs in Greece, Ireland and Portugal have failed.
Two-year Spanish yields rose 40 basis points on the day to 3.73 percent, having fallen sharply from highs of over 7 percent seen two weeks ago, just before ECB President Mario Draghi pledged to do whatever was needed to save the euro.
Italian two-year yields rose 38 bps to 3.47 percent, with traders saying thin volumes exaggerated the move.
"We are seeing some profit taking. We had a huge drop in yields and I think Spain asking for help is not imminent," one trader said.
Ten-year Spanish yields were 6 bps higher on the day at 6.86 percent, with the psychological 7 percent level that sparks fear an imminent loss of market access still within reach. Equivalent Italian yields were 5 bps up at 6.05 percent.
"More or less we are in a waiting mode. I don't expect big moves before the September (Constitutional Court) meeting," said Norbert Wuthe, senior government bonds strategist at Bayerische Landesbank.
As long as uncertainty remained high, room for Spanish and Italian bonds to rally further was limited, Wuthe said.
German Bund futures have also shown signs of hesitation in pricing in better times for the euro zone. On Thursday and Friday, they saw intra-day swings of more than 200 ticks, before stabilising somewhat this week.
On Tuesday, the September contract traded 10 ticks lower at 143.10. At 1.40 percent, 10-year Bund yields were 0.4 bps higher on the day, but bang in the middle of the 1.2-1.6 percent range seen over the European summer.
"Guesswork as to how forthcoming ECB/EU intervention might look continues," Commerzbank rate strategist Benjamin Schroeder said in a note, adding that last week's low of 142.64 could act as a lower bound for a new range in coming days.
Helaba Landesbank Hessen-Thueringen strategists said Bund futures may fall towards 142.22, the 61.8 percent retracement of the rise in July, but expected them to bounce afterwards, favouring a trading range of 142.22 to 144.08.