* Bunds fall before auction of Jan 2022 bond * Previous auction of this bond significantly undercovered * Underlying demand for Bunds to remain strong near-term By Marius Zaharia LONDON, Jan 4 (Reuters) - German Bunds fell on Wednesday before a new sale of a 10-year bond which met extremely low demand at its launch six weeks ago, raising fears the euro zone debt crisis may spread to the bloc's safest sovereigns. The re-opening of the bond is expected to fare better results than at the previous auction, helped by German bond and coupon redemptions of 37.7 billion euros flowing back to investors, according to Reuters data. The average yield when the bond was launched on Nov. 23 was 1.98 percent, with a bid/cover ratio of 1.1. However, taking into account the near 40 percent amount retained, bids were not enough to cover the amount of paper on offer. Commerzbank rate strategist David Schnautz said the market viewed the dismal launch as a result of a "pure technicality" and not a sign that Germany's safe-haven status was at risk. A recent fall in yields has highlighted that even the threat of a sovereign rating downgrade of Germany was not denting the appetite in one of the world's most liquid debt markets. Schnautz expected the auction to go "reasonably well", with a retention rate of around 20 percent and more bids than the amount on offer. "I expect Bunds probably to ease a bit into the auction and then there is a decent chance for some stabilisation as long as we end up with reasonable results that the market is comfortable with," he said. ING's head of investment grade debt strategy Padhraic Garvey said a good result would mean no more 1 billion euros retained and "ideally, the overall auction should be covered by at least 7 billion of orders," compared to the 5 billion euros on offer. The main risk for the auction is that 10-year yields are lower than in November and other bonds in the sector were cheaper for investors, analysts said. "It's tricky. I don't think the bond is great value. We've had decent German cash flows and coupons and that gives it a bit of support and I think it will be all right without being spectacular," a trader said. Bund futures were last 38 ticks lower at 137.91, with 10-year cash yields up 3.1 basis points at 1.934 percent. Dec. 28's session low of 137.74 was the first support level on the downside and an important short-term focus, UBS technical Richard Adcock said. If a poor auction pushes Bund futures below that level, they will target the 38 percent Fibonacci retracement of the November-December rally AT 136.96. BUSY ISSUERS France auctions long-term debt on Thursday, in a busy supply schedule to start of the year. Pre-positioning and hedging against a poor outcome may give further support to Bunds after the auction, Commerzbank's Schnautz said. French 10-year bonds last yielded 3.32 percent, slightly higher on the day and 140 bps over Bunds. But the key test of sentiment will be next week, when Spain and Italy -- the two countries most exposed to an escalation of the crisis -- issue bonds. The risk that the duo may struggle to sell their debt at affordable costs is expected to keep underlying demand for German debt strong, with any pullbacks seen limited and brief. Italian 10-year bond yields were steady, but remained within a whisker of the 7 percent level the market is considering unsustainable.

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