* Bunds fall as U.S. jobless rate unexpectedly falls * Spanish bonds rally but remain range-bound * Uncertainty over timing of Spanish aid remains * Analysts say hard to short Spanish and Italian markets By Ana Nicolaci da Costa and William James LONDON, Oct 5 (Reuters) - German bond prices fell sharply on Friday after a surprise drop in U.S. unemployment underpinned appetite for riskier assets, reinforcing a rally in debt issued by lower-rated euro zone sovereigns including Spain. Spanish bonds rallied on expectations the euro zone's fourth largest economy will eventually benefit from central bank intervention. But bond yields remained in recent ranges as questions persisted on when Spain might make a request for a bailout, which is a precondition of any European Central Bank bond-buying. The U.S. Labor Department said unemployment fell to 7.8 percent in September from 8.1 percent in August, compared with economists' expectations of a rise to 8.2 percent, sending U.S. Treasury prices lower. "It's more risk-on than anything else, because as unemployment rates are going to fall it makes the U.S. economy do a little bit better. That's going to have a knee-jerk reaction in these higher risk sectors such as peripherals," one trader said. German Bund futures fell 80 ticks to 141.67 as the debt issued by lower-rated countries rallied. Borrowing costs over two years for Spain fell 23 basis points to 3.15 percent, while the 10-year equivalent shed 22 basis points to 5.71 percent. Some analysts said a Reuters report detailing the scope of potential ECB intervention underpinned the move higher. The ECB envisions buying large volumes of sovereign bonds for a period of one to two months once its programme of "Outright Monetary Transactions" is launched, but would then suspend purchases during an assessment period, senior central bank sources told Reuters. "You get the sense that if it ever occurs it's going to be a big programme," said David Keeble, global head of fixed income strategy at Credit Agricole, adding that the market was getting to yield levels where momentum would be self-fulfilling. "You have got an enormous amount of carry by buying a Spanish or Italian bond still. It is very difficult to go short if you are a balanced portfolio manager because every time you go short in this market you are really possibly locking in a big loss." Italian 10-year bond yields were 7.7 bps lower at 5.06 percent. PORTUGAL Among the region's other higher-yielding bonds, debt issued by Portugal rallied sharply on the day. Ten-year yields fell to a three-week low of 8.24 percent, and stood down 46 bps at 8.25 percent in late trading. "There's not much flow behind it, but some people are betting that things are going to get a bit better for them after the bond swap and, who knows, maybe the ECB is even going to intervene there at some point. But it's all speculation at this point," one trader said. Earlier this week, Portugal carried out a swap to exchange bonds maturing next year for longer-dated debt, in what the country's debt agency head described as a first step towards regaining market access. Morgan Stanley recommended buying long-dated Portuguese bonds as the country edges back toward issuing debt. However, ECB President Mario Draghi said on Thursday the central bank will not by the bonds of already bailed-out countries such as Portugal under its new crisis plan because they do not have full access to bond markets. Over the medium term, analysts said price developments still hinged on how quickly Spain decides to ask for financial help to get ECB support. Next week's meeting of euro zone finance ministers had previously been flagged as an opportunity for Spain to make an aid request, but expectations have been pared back and the event may even result in further pressure on Spanish debt. "For sure everyone will keep an eye on the meeting but I don't think there's expectations of a firm decision. It could even expose more the differences in opinion," said Elwin de Groot, senior market economist at Rabobank. "Very short term, this could inject even more uncertainty and therefore a more negative sentiment in the market."