* Spanish 10-year bond yields jump back above 5 percent * Dealers seen clearing out space for new bond supply * Bunds rebound after deep selloff, fall may not be over By William James and Ana Nicolaci da Costa LONDON, Jan 14 (Reuters) - Spanish and Italian bonds weakened while German Bunds rose on Monday as the recent strong rally in riskier euro zone assets faded in a move blamed largely on impending auctions and technical trading. The trading unwound a significant chunk of last week's demand for higher yielding assets, but market participants said it did not represent a major change of sentiment from end investors who buy bonds to hold over the long term. "We're not seeing investors rushing for the doors or anything. This is more like dealers getting themselves in a good position for the supply later this week," a trader said. Spanish 10-year bonds were among the worst hit by the market reversal, with yields rising back above 5 percent to stand at 5.06 percent, up 17 basis points on the day. On Thursday, Spain sells debt maturing in 2015 and 2018 and will also tap a long-dated bond maturing in 2041. It is expected to skew issuance towards the shorter-dated bonds that sit within the scope of possible central bank support. Italy also announced the launch of a new 15-year benchmark, testing appetite for longer-term bonds for the first time in more than two years. The weight of supply had dealers selling existing holdings in order to clear space to buy the new debt when it is issued. Traders also said last week's rally had taken yields to expensive levels and exacerbated the selloff. The Italian 10-year bond rose 7 basis points to 4.19 percent. BUND REBOUND German Bund futures also reversed some of their 349 tick fall since prices peaked on Dec. 28, rallying 46 ticks to settle at 142.77. An unexpected fall in euro zone factory output gave investors further reason to buy into safe-haven German debt and to take profit on last week's rally in Spain and Italy. "Since the beginning of the year, we had a significant sell-off (in Bund futures) and there was a bit of a retracement of that and it was compounded by the industrial production numbers being weaker than expected," Ricardo Barbieri, strategist at Mizuho said. Industrial production in the region sharing the euro fell 0.3 percent in November from the previous month, against a forecast for a 0.1 percent rise - the latest sign of the euro zone's economic challenges. Technical analysts said Bunds were rebounding after testing key support levels on Friday but that the technical picture still pointed to further room for declines. "We hit a big support on Friday which was a price gap that we left behind from late October on the March contract as well as a Fibonacci projection support - that's 142.09-141.95 - so we think near-term the momentum has turned a little higher," David Sneddon, technical analyst, at Credit Suisse said. "Our bias though would still be to view strength as corrective for the time being. We still think the broader risk is lower still."