* EU steps to overcome crisis weigh on Bunds
* U.S. "fiscal cliff" limits downside
* German yields seen capped by economic outlook, rate policy
LONDON, Dec 14 German Bunds held broadly steady on Friday, as investors welcomed European steps to overcome the debt crisis but stayed cautious over an impasse in U.S. budget talks, leaving the market devoid of clear direction.
After four days of losses and a lower open, traders said bargain-hunters were buying back into the market and they expected further price swings as liquidity thinned and investors adjusted positions into the end of the year.
"We are heading into Christmas, year-end balance sheet adjustment and, if anything, people want to show that they are exposed to Bunds rather than peripheries," Rainer Guntermann, strategist at Commerzbank.
German Bund futures were nine tick higher on the day at 145.14.
The rebound from the day's lows coincided with a survey showing the euro zone recession deepened in the current quarter after the bloc's private sector contracted for the 11th successive month in December..
But analysts said the data had not fundamentally changed the economic outlook, and that opposing forces were at work.
"I am a bit cautious on the Bund because I think there are important decisions taken in Europe," Piet Lammens, strategist at KBC said. "On the fiscal cliff things are less clear at this juncture so (it is) a fight between various influences."
Concerns over whether U.S. lawmakers will manage to strike a deal to avert the "fiscal cliff" of steep tax increases and spending cuts early next year has provided underlying support for safe-haven debt in recent weeks.
EU finance ministers this week achieved a significant breakthrough in talks over a "banking union" by agreeing that the European Central Bank would be made the chief supervisor of euro zone banks. European leaders also approved long-delayed aid to Greece this week.
German bonds were flat across maturities, with the 10-year bonds yielding 1.35 percent.
"They have taken an important step towards further integration... Once you take this step, you are creating a platform from which you can take another step," Elwin de Groot, senior market economist at Rabobank, said.
"From the markets' perspective, this increased fiscal unity is something that ultimately we believe... will have a negative impact on the Bund."
In the short term, however, he expected German yields to be capped by generally weak economic activity data, expansionary monetary policy and worries about the U.S. budget talks.
De Groot saw 10-year yields holding around current levels as year-end approached but with potential to fall to 1.30 percent.
Spanish and Italian bonds rose, after some selling this week due to growing political tensions in Italy, following Prime Minister Mario Monti's announcement at the weekend of his plan to step down early.
Monti, seen as a guarantor of continued reform, faced increasing pressure on Thursday to stand as a candidate in an election expected in February after Silvio Berlusconi's surprise offer to drop his bid for a fifth term as premier.
Ten-year Italian yields were down 4.5 basis points at 4.60 percent, while the Spanish equivalent was 3.2 bps lower at 5.39 percent.