EURO GOVT-Weak German debt sale hurts Bunds
* Bund futures near 6-week low after weak auction
* Uncertainty over near-term outlook weighs on Bund auction
* Spanish yields steady before Madrid bond sale on Thursday
By Emelia Sithole-Matarise and William James
LONDON, Feb 20 (Reuters) - German debt prices fell and a sale of 10-year bonds struggled on Wednesday as investors kept to the sidelines before events likely to determine demand for low-risk assets in coming weeks.
The 4.04 billion euro bond sale drew less demand than expected, falling short of previous auctions and narrowly avoiding becoming the first German auction in five months to see bids fall short of the total amount issued.
Bund futures fell 59 ticks to 142.23 after the auction, their lowest in nearly a week, before settling at 142.42. German 10-year yields rose 4 basis points to 1.66 percent.
Market participants attributed the weak demand to a reluctance to take big positions before Italian elections this weekend, as well as to the need for clearer signals from economic data before judging progress across the currency bloc.
"This is a weak result with the auction only just being covered on a real basis," Rabobank rate strategist Lyn Graham-Taylor said, although he highlighted the bond sale came at a competitive price compared to secondary market levels.
"This (weakness) may be explained by the general risk-on tone of recent times and also that many investors are looking to sit on the fence heading into the Italian elections."
Tuesday's upbeat investor sentiment data from Germany was also cited as a factor behind the sluggish demand, and further encouragement from purchasing managers' index number on Thursday and a German survey on Friday could extend the fall in Bunds.
Nevertheless, worries that the Feb. 24-25 Italian election will produce a fragmented coalition government with limited scope to reform were likely to keep Bund futures in the 141.80-143 range that has held over the last two weeks, analysts said.
"We can retest this 141.80/90 level on the Bund if we have strong data but it could prove to be strong support as long as there's (uncertainty over) Italian elections and it could be a potential to enter into German bonds," said Eric Oynoyan, a strategist at BNP Paribas.
Despite Italy's looming election, the country's 10-year bond yields were a modest 2 basis points up on the day at 4.42 percent, remaining in the middle of the 4.13-4.64 percent range that has prevailed since January.
Traders said there were some buyers willing to take advantage of price dips and this has stabilised the market this week.
DZ Bank said shorter-dated Italian bonds looked attractive as overall market sentiment improved and in anticipation of a fresh rally if former Prime Minister Silvio Berlusconi's election campaign fails to win him influence.
Elsewhere among the region's struggling peripheral states, Spanish 10-year bond yields were steady on the day at 5.21 percent before a wave of supply expected to hit the market in coming days.
On Thursday Spain will sell up to 4 billion euros of conventional bonds and has also offered investors dollar-denominated bonds for the first time since September 2009.
The five-year dollar bond will enable Madrid to diversify its investor base and tap into the large community of yield-hungry emerging markets funds.
Spain has so far raised 22.7 billion euros of a 121-billion-euro target.
"It doesn't look like there's any problem for Spain trying to fund itself," said David Keeble, global head of fixed income strategy at Credit Agricole, adding he preferred Spanish and Portuguese bonds versus Italy in the run-up to the elections.
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