* Lower-than-expected ECB repayment weighs on 2-yr yields * Payrolls data eyed for clues on Fed policy direction * Feb. 22 ECB repayments next landmark for money market By Marius Zaharia and William James LONDON, Feb 1 (Reuters) - Yields on short-term German bonds fell on Friday after the ECB said banks will repay only a small amount of emergency three-year loans next week, while longer-term yields had a choppy session after mixed U.S. data. Banks will pay back 3.5 billion euros of loans taken late in 2011 when the European Central Bank flushed the market with long-term loans to prevent a credit crunch. The number, well below a median forecast of 20 billion euros in a Reuters poll, prompted some to trim their projections on how fast excess liquidity will drain out of the banking system and, as a result, how quickly money market rates will rise. That spilled over into the short end of the German curve where two-year yields fell 2 basis points to 0.24 percent, erasing some of the 11 basis point rise seen since last week's first wave of repayments came in higher than expected. "That figure curbed some of the recent excitement," one trader said. "People now think the short-end (yield) went too far and they are back buying." In the United States, a closely-watched U.S. non-farm payrolls report suggested that the jobs market was healing, but only at a subdued pace that is unlikely to make the Federal Reserve pull away from its stimulus policy. Bund futures rose as high as 142.45 after the jobs report, but fell later after data showed the manufacturing sector growing faster than expected in January. They last traded at 142.03, up 13 ticks on day. Cash 10-year German yields were 1 bps lower at 1.67 percent. "The market is now realising that the U.S. is having moderate growth, but nothing that will dissuade the Fed from staying on course with its policy," Mizuho strategist Ricardo Barbieri said. "I would expect to see a consolidation ... at 1.70 percent in yield I am comfortable buying back a little bit of 10-year (bonds)." ECB REPAYMENTS Banks can repay their long-term loans to the ECB every week and short-term German bonds are likely to be highly sensitive to the numbers. The announcement due on Feb. 22 is most keenly awaited, as that figure will include repayments from the second batch of long-term ECB loans taken last February and was expected to drain another large lump sum of cash from the banking system. "Markets were very unsure what they had to expect from these weekly repayments after the first one. The reactions will be erratic now from week to week," said Piet Lammens, strategist at KBC. In the lower-rated euro zone countries yields were slightly higher, with the Spanish and Italian 10-years rising 3 bps to 5.22 percent and 4.33 percent, respectively. A six-month-old rally has stalled in recent days, with investors getting more cautious ahead of Italian elections later this month. The vote could result in a fragmented parliament that could weaken the government's ability to implement reforms needed to boost growth and cut debt. "In my recommendations portfolio I am still overweight the periphery, but have reduced it a little because we've rallied a lot and we have Italian elections coming up," Mizuho's Barbieri said.