* ECB's Mersch ramps up talk ECB ready to ease next week
* Most euro zone bond yields fall
* Low yields sideline investors at 30-yr Bund sale (Adds ECB Mersch comments, German 30-year auction)
By Emelia Sithole-Matarise
LONDON, May 28 Spanish bond yields hit record lows on Wednesday as weak lending data and comments by European Central Bank policymakers bolstered expectations the bank will soon provide monetary stimulus, fueling demand for fixed income.
Euro zone government bonds across the credit spectrum have firmed this week as fears receded that big wins by anti-euro parties in EU parliamentary elections might derail fiscal reforms in weaker countries. At the same time, expectations grew that the ECB will ease policy next week.
ECB executive board member Yves Mersch ramped up the rhetoric on Wednesday, saying the June 5 meeting could yield a combination of policies to tackle low inflation and low credit growth, but the timing of implementation could vary. That followed similar hints by ECB President Mario Draghi and colleague Ewald Nowotny earlier this week.
Data showing lending to households an firms in the euro zone fell further in April and money supply shrank, supporting the case for ECB action.
As well as a rate cut, the ECB is preparing a package of other easing measures, Reuters reported earlier this month. They include cutting the deposit rate into negative territory - effectively charging banks to hold cash at the ECB overnight - and measures aimed at helping to increase lending to smaller companies.
"The data newsflow is quite poor and we see that the ECB are clearly confirming that something more than just a rate cut is on the cards for next week and the market is clearly reacting to that," said Jean-Francois Robin, a strategist at Natixis.
Spanish 10-year yields fell 4 basis points to a record low of 2.82 percent, according to Reuters data. Italian equivalents were 6 bps lower at 2.94 perent, not far from the record low of 2.89 percent they reached two weeks ago.
Italian yields extended this week's declines after Prime Minister Matteo Renzi's party scored a surprisingly big win in EU parliamentary elections over the anti-establishment 5-Star Movement.
POOR GERMAN 30-YEAR SALE
The firm tone augured well for an Italian auction on Thursday of 6.0 billion to 7.5 billion euros of five- and 10-year bonds, after a smooth sale on Tuesday of 3 billion euros of zero-coupon debt and 1 billion euros of inflation-linked bonds.
"There might just be a little bit of concession going into the auction tomorrow but it should go OK," a trader said. "Bigger picture, we still remain constructive on the periphery given the ECB outlook and think there will be further compression in spreads."
For top-rated issuer Germany, however, ultra-low yields undermined investor demand at an auction of 30-year bonds on Wednesday. The sale drew fewer bids than the 2 billion euros Germany was aiming for and followed another poorly received Bund auction last week.
"Given the very expensive levels reached by the Bund, what's the point of going for the 30-year Bund when you can go for some yield pick-up in (French) OATs or Spanish 30-year?" Robin said.
The 30-year Bund yielded 2.24 percent in the secondary market, just over 50 bps more than similar-maturity French bonds and 175 bps above Spanish 30-year yields.
German 10-year Bund yields, the benchmark for euro zone borrowing, were down 2 bps on the day at 1.37 percent. (Editing by Larry King)