* Bunds rally to 1-1/2 week high after breaking resistance
* Investors ditch riskier assets in favour of Bunds
* Greek bond yields soar, Italy and Spain pressured
By William James
LONDON, March 23 (Reuters) - German Bund futures broke above key technical levels on Friday, extending this week's rally as investors shifted out of lower-rated government debt and ditched riskier assets in favour of safe-haven bonds.
Bunds rose to a 1-1/2 week high with traders citing big sellers of equities and resurgent worries that euro zone growth was lagging a stronger performance in the United States.
Yields rose on debt issued by Italy, Spain and Greece, where growth is a key element of plans to cut public debt, with investors nervous about the persistent risk of budget slippage and political hurdles to fiscal reform.
"There's talk of a big investment bank switching out of equities and that's obviously pushing people into core fixed income like Bunds and (U.S.) Treasuries," one trader said.
"We also saw some selling in the likes of Spain and Italy earlier. That's largely sentiment driven."
A second trader also said talk of asset reallocation away from equities was driving the market, and European stocks were lower on the day.
Bund futures hit 137.57, up 48 ticks on the day, after breaching a widely-watched resistance level at 137.16 - the 50 percent retracement of last week's steep selloff.
Technical charts showed the next target was for a rise to close the 137.67 and 137.75 gap between the March 13 low and the March 14 high.
GREEK BONDS HIT
Greece's newly-restructured bonds suffered their worst trading day since being launched on March 12, with yields on the 10-year bond rising by more than a percentage point to top 20 percent.
"It's not something unexpected. Greece still has a long way to go ... maybe the debt is a bit lower but actually little has changed," a trader in Athens said.
Greece carried out the largest-ever sovereign debt restructuring earlier this month to slice 100 billion euros off its public debt and unlock urgently-needed bailout cash.
Traders said few bonds were changing hands at current prices but that dealers were marking the yield higher, reflecting pessimism that the restructuring would be enough to set the Greek economy on a sustainable path.
Elsewhere on the periphery, Italy came under close scrutiny as Prime Minister Mario Monti faced stiff resistance to attempts to drive through labour reforms.
"If he doesn't gain traction and opposition support, he won't be able to get the reforms through... and that would be the catalyst for underperformance of Italy versus Spain," said Achilleas Georgolopoulos, strategist at Lloyds Bank in London.
Spain's slippage on budget deficit targets has seen its 10-year bond yield rise as much as 44 basis points above those on equivalent Italian debt.
However, in light of the uphill struggle over Italian labour reforms, Lloyds looked for that spread to narrow in the short term. Investors also saw Italian supply next week as a source of pressure.
Italian yields were up 7 basis points at 5.17 percent, with Spain 4 bps higher at 5.54 percent.
