* Spain, Italy suffer as Cyprus bailout seen as template * Initial relief at Cyprus deal evaporates, Bunds rebound * Italy political risks still high on investors' agenda By William James LONDON, March 25 (Reuters) - Spanish and Italian bond yields rose on Monday as policymakers fuelled worries that Cyprus's bailout, which hit investors hard, could be used as a template for the region's other struggling countries. Initial relief that Cyprus had reached a last-gasp deal to avoid financial meltdown quickly reversed to drive safe-haven German Bunds higher and put peripheral bonds under pressure after comments from Jeroen Dijsselbloem, who heads the Eurogroup of euro zone finance ministers. Among other measures, the Cypriot bailout wound down the country's largely state-owned Popular Bank of Cyprus, wiping out senior bondholders, while depositors with more than 100,000 euros in their accounts will face a large levy. Dijsselbloem said this structure represented a new template for resolving euro zone banking problems and other countries may have to restructure their banking sectors. That turned the spotlight on Spain, whose banks have suffered badly from souring property loans. "We're all now coming round to the idea of bail-ins along with bail-outs, but to maybe suggest that the first point of call is the sovereign state of a bank, or the creditors of banks - that's a big leap," a London-based bond trader said. "If you're an uninsured depositor at a bank in Spain you wouldn't be too happy about this." Spanish 10-year bond yields rose 10 basis points on the day, to 4.96 percent, while the Italian equivalent bond yield rose 5 bps to 5.58 percent. Both were within recent ranges but the implication of the Cyprus deal could make investors more sensitive to the two countries' problems. Spain's economy is in recession and data points to a further deterioration that will hamper Madrid's efforts to rein in public finances and keep government borrowing under control. ITALY RISKS In Italy, investor concern is focused on the fallout from inconclusive elections a month ago that left the euro zone's third largest economy struggling to form a government, raising worries that reform efforts would be impaired. "The situation in Italy has been overshadowed, but it remains a big risk factor," said Niels From, chief analyst at Nordea in Copenhagen. "There could be more focus on it now that they have to start more seriously to find a government. The risk is of new or early elections and what the outlook is for how the parties will be (represented) in the parliament." Former prime minister Silvio Berlusconi, whose strong showing in the election rattled many investors, has demanded to be included in any new government, but there was no sign his centre-left rival Pier Luigi Bersani was considering such a move. German Bund futures, sought in times of market stress for their low risk and high liquidity, rose 36 ticks to 144.73 - back to levels seen last week before Cyprus's bailout was agreed. While the list of concerns continues to grow for euro zone investors, traders said the flow behind Monday's market moves was minimal, indicating that many long-term investors had yet to decide on the implications of recent events. Market participants said the European Central Bank's long-standing promise to start buying government bonds if a struggling state needs assistance was helping to keep panic selling to a minimum.