* Ten-yr yield off 2-wk high, set for 2nd year of decline * Sales tax debate in focus By Akiko Takeda TOKYO, Dec 29 (Reuters) - Japanese government bonds were steady to slightly higher on Thursday in thin trade, pushing down the benchmark yield from a two-week high as renewed concerns over Europe's debt woes knocked stocks. The benchmark 10-year yield is poised for its second straight year of declines largely as the euro zone debt crisis and the global economic slowdown have boosted the safe-haven appeal of JGBs. Market players expect that to continue next year, helping counter fears that the uncertain outlook for a sales tax hike in Japan could spur yield rises. Markets are now waiting for the outcome of a sale of up to 8.5 billion euros of Italian bonds on Thursday. Italy faces around 100 billion euros in bond redemptions and coupon payments between January and April. March 10-year JGB futures were up 0.10 point at 142.27, but face strong resistance from the bottom of the daily Ichimoku cloud at 142.56. "Investor demand is on pause for now as settlement for delivery will be next year," said Hidenori Suezawa, chief strategist at SMBC Nikko Securities. "The number of players in the market is falling and activity is subdued." The 10-year cash bond yield was down 0.5 basis point at 0.990 percent, off a two-week high of 0.995 percent hit on Wednesday, but keeping above a three-week low of 0.965 percent marked last week. The benchmark yield has fallen 12 basis points this year after dropping 17.5 basis points in 2010. The five-year yield was flat at 0.350 percent on Thursday, while the 20-year yield was unchanged at 1.760 percent, off a three-week peak of 1.765 percent hit on Wednesday. The yield curve bear-steepened on Wednesday as yield rises in superlongs such as 20- and 30-year bonds outpaced those of other sectors, with debate on the sales tax increase denting investor appetite for longer maturities. FISCAL HAWK The government is trying to flesh out its sales tax hike proposal by the end of the year, but Prime Minister Yoshihiko Noda, a fiscal hawk who took office in September, has indicated that his self-imposed deadline might slip since a party tax panel was having trouble reaching a consensus. Some market players expect low volume could exaggerate market moves and lead to volatility, though many see yields staying rangebound as most investors have finished adjusting their positions ahead of the New Year holiday. "There will be some kind of tax hike proposal coming out today, and people are focusing on this but it is hard for players to take positions just on this factor," said a trader at a U.S. brokerage in Tokyo. "If yields go lower, such as by 1.7 percent on 20-year bonds, profit-takers will emerge. So the market will likely stay rangebound." Japan's leading share index fell 0.3 percent on Thursday.

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