* Bunds dip as Fed expected to continue monetary easing
* Greek buy-back result seen acceptable
* Italian bonds continue to recover after Monday sell-off
By Marius Zaharia
LONDON, Dec 12 (Reuters) - German government bond prices dipped on Wednesday as investors anticipated more Federal Reserve stimulus and on hopes that U.S. lawmakers were getting closer to reaching a budget deal.
An acceptable result in Greece's debt buy-back operation and calmer Italian debt markets as they reassess Prime Minister Mario Monti's decision to step down earlier than expected also weighed on German debt.
The U.S. Federal Reserve is expected to announce a fresh round of bond buying on Wednesday as part of its efforts to support a fragile economic recovery threatened by political wrangling over the government's budget.
Economists polled by Reuters expect the Fed to announce it will replace its expiring Operation Twist programme with a fresh $45 billion per month of bond buying that will further expand the U.S. central bank's $2.8 trillion balance sheet. It will also commit to keep buying $40 billion per month in mortgage-backed securities, as announced in September.
Traders say that if the Fed delivers on the expectations, a rally that has taken European shares to 18-month highs could continue. That in turn could weigh on safe-haven assets outside the United States, such as Bunds.
"The Fed dominates the landscape. Markets will be disappointed if (no more stimulus is announced), they are waiting for somewhere between $40 billion and $50 billion of monthly buyings," one trader said.
Bund futures were last 22 ticks lower on the day at 145.19.
But monetary stimulus may not be enough to sustain U.S. economic growth if lawmakers cannot reach a budget deal to avert $600 billion of automatic fiscal tightening measures due to come into effect early next year.
President Barack Obama and U.S. House of Representatives Speaker John Boehner spoke by phone on Tuesday to exchange new proposals, in what investors saw as a sign of progress in efforts to avoid the fiscal cliff.
"It is a very fluid situation, but I think the pendulum has swung to being a little bit more positive this week," the same trader said.
In Greece, a buy-back scheme key to the disbursement of future aid tranches to Athens left international lenders with a 450 million euro hole in their plan to cut the country's debt to a more manageable level.
But analysts were confident that Greece would still get the funds it needs to stay afloat.
"That's small, really," Rabobank market economist Elwin de Groot said. "It's too narrow a gap to be a big problem. There's too much capital already invested in the exercise (of bailing Greece out)."
Greek bonds continued to rally as holders expect to be paid in full now that the amount of debt owned by private investors is too small for a restructuring of those bonds to make a significant difference in terms of debt sustainability.
The yield on the February 2023 bond fell 78 basis points to 12.8 percent.
Italian bonds recovered a large chunk of their Monday losses triggered by Monti's announcement. Ten-year yields fell 5 bps on the day to 4.69 percent, versus last week's close of 4.52 percent and this week's high of 4.95 percent.
Markets reacted negatively to Monti's earlier-than-expected departure as most investors believed the technocrat was the best placed person to reform Italy and bring down its huge debt levels. The re-emergence of his flamboyant predecessor Silvio Berlusconi - a pariah for markets - before next year's elections also played a role in the sell-off.
Investors are now reassessing the situation.
"The resignation is an eye-popping measure, but now the elections are being brought forward by six weeks. That's not a big deal," KBC strategist Piet Lammens said.
"The polls talk about a big advantage for the centre-left party ... while Mr. Berlusconi's party is on the losing side."