* German debt falls as investors trim safe-haven positions
* Progress on 'fiscal cliff' talks drives thin European trading
* Spanish, Italian bonds benefit from better risk appetite
By William James
LONDON, Dec 18 German Bund futures slipped on Tuesday as increasing signs of progress in U.S. budget talks eased demand for low-risk assets with trading set to remain choppy into year-end.
The prospect of a series of painful automatic austerity measures next year dimmed slightly when, according to a source familiar with the talks, U.S. President Barack Obama made a counter-offer to Republicans that included a change in position on tax hikes for the wealthy.
That spurred some investors to trim their holdings of safe havens such as U.S. Treasuries and German debt -- assets used as hedges that should rally if a "fiscal cliff" deal isn't struck. Bund futures fell 21 ticks to 144.65.
"The markets are very thin out there and so price moves could get overdone today," a trader said.
Traded volume in the Bund future was well below average at less than 50,000 lots by 0800 GMT with many long-term investors reluctant to make major changes to their positions before the new year, leaving trading dominated by more speculative players.
"The only uncertainty remaining this year is on the fiscal cliff so this is probably going to be the driver this week... We recommend coming at the Bund from the short side," said Michael Leister, senior strategist at Commerzbank.
Commerzbank was recommending taking positions to profit from a fall in the Bund future over the course of the session, targeting the 144 area.
This was also based on comments from the European Central Bank's Yves Mersch, who told a German newspaper he did not see the logic of a debate about the bank cutting its main rate from the current record low.
The better appetite for risk-taking in the market benefited the euro zone's peripheral sovereigns, with Spanish and Italian bond yields edging lower on the day.
The Italian 10-year yield fell 4 basis points to 4.54 percent while the Spanish equivalent slipped 3 bps to 5.43 percent.