Dec 29 (Reuters) - German government bond futures edged higher on Thursday with markets in a cautious mood ahead of an Italian bond sale. Italy plans to sell up to 8.5 billion euros of bonds, including new tranches of its three- and 10-year benchmarks, in its first long-term debt sale since the European Central Bank's huge three-year funding operation last week. Yields are expected to fall from recent record highs with the ECB funding easing market pressure at least for now . Italy faces around 100 billion euros in bond redemptions and coupon payments between January and April. March Bund futures were 7 ticks higher at 138.28 with benchmark 10-year yields little changed at 1.894 percent. Two-year yields were a basis point lower at 0.16 percent after hitting euro lifetime lows of just 0.14 percent on Wednesday, benefiting from banks using nearly half a trillion euros of ECB funds to buy low-risk, highly-liquid assets. Italian BTP futures were 5 ticks lower at 91.50, although there was little trade, with 10-year yields locked above 7 percent in the secondary market. Liquidity in all markets is extremely thin over the Christmas and New Year period exaggerating price moves.

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