EURO GOVT-Political tensions prompt profit-taking in Italy
* Italian debt under pressure on political tensions
* ECB stays on hold; Bund in ranges
* Investors continue to seek French bonds at auction
LONDON, Dec 6 (Reuters) - Italian and Spanish government bonds fell on Thursday as political developments in Italy prompted investors to cash in on a recent rally, while Bunds were in tight ranges as the European Central Bank kept rates on hold.
Italian premier Mario Monti's government survived a Senate confidence vote on economic measures but a walkout by Silvio Berlusconi's PDL party indicated political tensions were rising before an election expected in March..
Italian debt came under selling pressure and Spanish debt followed suit a day after a disappointing Spanish bond sale also underscored the limits of a bond rally, which traders said was based on sentiment after a deal on Greek debt rather than on economic fundamentals.
"After the recent rally this is very good opportunity to sell Italy," one trader in Milan said.
Ten-year Italian government bond yields increased 11 bps to 4.57 percent and the Spanish equivalent rose 11 bps to 5.53 percent.
The German Bund future was up 7 ticks on the day at 145.17, after the December contract rolled over into the March one.
The sell-off in peripheral bonds came just before the ECB left interest rates steady at 0.75 percent, in line with expectations, with attention shifting to new economic forecasts as investors seek clues about monetary policy in 2013.
Analysts expect the ECB will also reiterate that an aid request is a pre-requisite for the bank to buy the bonds of indebted euro zone states.
"The ECB will keep the door open for maybe another refi rate cut early next year," said Patrick Jacq, European rate strategist at BNP Paribas.
"I think there will be no change from the latest press conference in early November."
On Nov. 8, ECB President Mario Draghi said the euro zone economy showed little sign of recovering before year-end, leaving open the possibility of an interest rate cut in the months ahead.
Long-term worries about the euro zone and more immediate concerns about talks in the United States aimed at averting a fiscal crisis have recently benefited safer government bonds. French 10-year yields hit euro-era lows on Wednesday.
The backdrop helped a 3.97 billion euro sale of French bonds. The Treasury sold at the top of its target range as investors sought the liquidity and safety of the French market, even after Moody's downgraded the euro zone's second largest economy's credit rating last month.
In the secondary market, 10-year French yields were up 2.6 basis points at 2.03 percent.
"Even at 2 percent, (the French yield) might be (at) euro-era lows, but it's still cheaper than German," a second trader said, predicting that the premium 10-year French debt offers over Germany would fall further as year-end approaches from 69 basis points currently.
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