* Dutch yields ease with auction in focus * Netherlands to sell up to 2.5 bln euros of bonds * Spain and Italy also sell debt By Kirsten Donovan LONDON, April 24 (Reuters) - Dutch government bond yields eased on Tuesday before a closely-watched debt auction a day after the government tendered its resignation following failure to agree austerity measures. Moody's said the collapse of the coalition was a "credit-negative", although it maintained it triple-A rating with a stable outlook. The 10-year Dutch yield spread over Bunds hit its widest in three-years on Monday, on worries not only about the country previously seen as a solid investment, but also about eroding support for euro zone measures to contain the debt crisis. Yields eased, however, ahead of an auction of up to 2.5 billion euros of two- and 25-year bonds with analysts saying the small size of the sale meant there should be adequate demand. "The auction will be a litmus test as to demand for their paper given the impending a election... if there's a marked increase (in yields) then we'll know investors are getting a bit more worried," said Brian Barry, fixed income analyst at Investec. "At the moment things are starting off on a firmer footing so there's nothing to indicate that we're going to see a very negative result." Two-year yields were 6 basis points lower at 0.46 percent, with 10-year yields easing a similar amount. "It is likely that the 2037 (bond) will be the last issuance in 2012 of ultra-long Dutch paper and so should still see demand from duration-hungry asset managers such as pension funds," Rabobank rate strategists said in a note. However, there will be competition from Germany's auction of 30-year bonds on Wednesday and the UK, which is lining up a syndicated sale of 40-year gilts. A solid Dutch auction is unlikely to calm nerves for long with the debt crisis intensifying. Spain, which has taken centre stage on concerns about its ability to meet budget targets as well as the health of its banks, will sell three- and six-month treasury bills later on Tuesday. Yields are expected to rise substantially. "Markets are going to fluctuate but over the next 3-6 months it's hard to believe there's going to be any real joined up political will or any economic data which suggests we're near the end of the crisis," said Gary Jenkins, director of Swordfish Research. "That means Spanish and Italian yields will continue to rise and Bunds most likely stay close to where they are." June Bund futures were 22 ticks lower at 141.07 after hitting record highs of 141.37 on Monday. "The crisis is coming from all angles," a trader said. "At these levels in Bunds you have to think a lot of the short positions of a couple of weeks ago have been covered but we can still go higher. It's hard to know what can stop it when even the firepower of the (euro zone) rescue fund doesn't look big enough." Ten-year German yields were almost 2 bps higher at 1.575 percent, not straying far from all-time lows of 1.549 percent. Traders said market players were scaling back the size of their trades, or risk positions, as market volatility increased. "In a volatile situation, you don't need a big bet on to find you've got it horribly wrong," said another trader. "Risk positions get pared back and that exacerbates the situation more. Everyone comes in the morning with a flat book and the first three trades will set the tone for the day." Italy will also sell zero-coupon and inflation-linked paper.

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