* U.S. payrolls data beats expectations, hit Bunds
* U.S./German 10-year yield spread widest since Oct. 2006
* Portuguese sell-off eases as PM says government to hold
By Emelia Sithole-Matarise and Marius Zaharia
LONDON, July 5 German government bonds fell on Friday after forecast-beating U.S. jobs data kept the Federal Reserve on track to reduce stimulus, but losses were limited by the European Central Bank's contrasting policy outlook.
U.S. Treasury bonds fell more sharply than Bunds after the much-anticipated data and the U.S./German 10-year yield spread hit its widest since October 2006 at close to 100 basis points.
U.S. employers added 195,000 new jobs last month, 30,000 more than the market had expected, showing the U.S. economic recovery was gathering pace and keeping the Fed's plans to scale back bond purchases later this year on track.
German debt, which usually trades in line with U S. Treasuries due to the two assets' safe-haven status, sold off, pushing yields higher across the curve. Bund futures were last half-a-point lower at 141.79, having fallen as low as 141.39 immediately after the data.
But analysts said the ECB's unprecedented commitment on Thursday to keep rates at record lows for an extended period or even cut them would stop euro zone benchmark yields rising far.
"The data was pretty good ... but it was surprising the market here in Europe reacted that massively," said Christian Lenk, strategist at DZ Bank in Frankfurt.
"The market is unlikely to continue this sell-off. (ECB President Mario) Draghi has stressed there's a major difference in the outlooks of the Fed and the ECB."
He said a political crisis in Portugal and doubts about the disbursement of the next tranche of Greek bailout deal were also likely to support Bunds.
The prospect of less central bank liquidity meant longer-term German yields rose faster than those on shorter-dated debt.
Ten-year German yields rose 5 basis points to 1.71 percent, while two-year yields rose 1 bps to 0.13 percent.
"The short end should outperform given the ECB outlook, but the movement in the long end should still be a fraction of the movement in the U.S. because the euro zone economy is lagging," said Alan McQuaid, chief economist at Merrion Stockbrokers in Dublin.
U.S. T-note yields rose 17 bps to 2.67 percent.
In Portugal, bond yields fell sharply following the prime minister's assurances on Thursday that he can keep the government stable after two ministers resigned this week.
The crisis raised worries over the future of Pedro Passos Coelho's government and its ability to exit a 78 billion euro bailout programme by mid-2014 as planned.
Portuguese 10-year yields, which topped 8 percent earlier this week, were last 25 bps down on the day at 7.16 percent.
Two-year yields fell 41 bps to 5.62 percent.
The fall in shorter-dated yields was, however, insufficient to reverse the sharp underperformance of longer-term maturities this week which saw the yield curve at its flattest since March 2012, reflecting perceptions of rising credit risk.
DZ Bank's Lenk said the market had over-reacted to the crisis. "But Portugal is a different kind (of bond) compared with the other peripherals. Not being investment grade restricts a lot of investors and liquidity is low."
Italian and Spanish yields, which also rose this week, albeit less steeply than Portugal's, on fears of a fresh flare-up in the euro zone debt crisis, fell 2-4 bps at 4.40 and 4.60 percent respectively.
The rise in Italian and Spanish yields was tempered by the ECB's long-standing conditional pledge to buy the bonds of countries that seek its help and by a growing perception among investors that the fortunes of the euro zone's troubled debtors and no long as tightly linked as they once were.