EURO GOVT-Bunds fall after poor 10-year auction

* Bunds fall after poor 10-year German bond auction

* Periphery calm, waiting for ECB meeting

* The Netherlands sells $3.5 bln bonds

By Kirsten Donovan

LONDON, Sept 5 (Reuters) - German government bonds fell on Wednesday, reversing an earlier rally as investors proved reluctant to buy a new 10-year bond with low yields, heavy core issuance and the prospect of ECB bond buying to support Spain and Italy all weighing on demand.

The European Central Bank is expected to flesh out some details of its proposed bond buying programme after its policy meeting on Thursday. Investors have been wary, however, given major uncertainties over the plan and had snapped up bonds sold by relatively low risk countries Austria and Belgium earlier in the week.

But the record low 1.5 percent coupon on Germany's new bond, when investors had so many opportunities to pick up other slightly higher-yielding assets, took its toll on the sale.

"Investors are very sensitive to the ECB meeting tomorrow as the odds are that (ECB President Mario) Draghi can come out with measures that are friendly for peripheral markets and that will trigger a sell-off in Germany," said ING rate strategist Alessandro Giansanti.

"The level of yields is really low too, and ...those are the factors that have triggered a soft auction today. But it's not dramatic and not the first time that has happened this year."

Investors bid less than the 5 billion euros Germany was offering, meaning the auction was a "technical fail". This also happened at the launch of the previous 10-year benchmark issue in April, but otherwise the country has seen good demand for its debt in the primary market this year.

"Today's disappointing Bund result does not presage Germany encountering difficulty in funding itself but rather underlines the fact that, as long as the market continues to travel in hope as regards an eventual crisis solution, the cost of such funding is likely to rise," said Rabobank rate strategist Richard McGuire.

In contrast to Germany, the Netherlands sold $3.5 billion of a new three-year dollar-denominated bond - well above the $2 billion minimum issue size - after coming to market at short notice to take advantage of the good demand for core bonds seen earlier this week.

German Bund futures were last 23 ticks lower at 143.27, with 10-year yields 2.5 basis points higher at 1.41 percent, having retraced around half of the rise seen during August.

Bunds had pushed higher in earlier trading after Purchasing Managers' Index data showed the economic rot that began in smaller peripheral euro zone countries was taking hold in Germany, the region's largest and strongest economy , although traders said this was not really a surprise.

ECB EXPECTATIONS

ECB President Mario Draghi told European lawmakers on Monday that purchases of short-term sovereign bonds to help debt-burdened countries like Spain and Italy would not breach European Union rules, according to a recording obtained by Reuters.

That buoyed peripheral bonds issued by Spain and Italy, pushing shorter-dated yields sharply lower and the difference between two- and 10-year Spanish bond yields to a new high.

Both Spanish and Italian shorter-dated yields were slightly higher on Thursday, but longer-dated bonds were little changed.

Nordea analyst Niels From said the ECB would probably be limited in how much it could say before the German constitutional court votes to ratify the permanent ESM euro zone rescue fund next week.

"If the market is waiting for the whole package from the ECB tomorrow, then they're probably going to be disappointed," From said.

"But we don't expect a massive sell-off in the periphery, although there will be some disappointment pressure on spreads to widen, or a massive rise in the Bund future."