* Spanish 10-year yields over 7 percent * Two-year Bund yields turn negative after ECB rate cut * Bund futures hit three-week highs * Markets unconvinced the ESM can ease periphery tensions By Marius Zaharia LONDON, July 6 (Reuters) - Yields on Spain's 10-year government bonds rose back above 7 percent on Friday, a week after euro zone leaders agreed moves to tackle the bloc's debt crisis, while two-year German yields turned negative following an ECB rate cut the previous day. Spanish yields had fallen after the summit deal to allow the euro zone's bailout funds to support banks and buy peripheral debt in secondary markets, but investors still doubt the fund has enough capacity to perform those tasks efficiently. Investors dumped riskier assets on Friday despite the European Central Bank's lowering its key interest rate to 0.75 percent and its deposit rate to zero, as the bank did not give a hoped-for hint of future steps to ease tensions in debt markets. Some had hoped the ESM bailout fund would eventually be allowed to borrow money directly from the central bank, but ECB President Mario Draghi dismissed that idea in a news conference following Thursday's rate decision. "There was a perception in the market that the ECB would provide at least a hint ... that the ECB was ready to support at least in some form (peripheral bond markets), UBS rate strategist Gianluca Ziglio said. "The EU has lost a very, very big opportunity and it seems it is being punished by the market ... Things are going to get worse for the periphery." The zero deposit rate - the rates banks receive when parking money at the ECB overnight - was a further blow to expectations the ECB would resume its controversial bond-buying programme, as it could make sterilising such purchases problematic. Both interest rates are now at historic lows. With Spanish yields again breaching the 7 percent level above which Ireland and Portugal were forced to seek aid, Ziglio said worries that Spain may need a sovereign bailout - in addition to a rescue package of up to 100 billion euros already secured for its ailing banks - were coming back into focus. Italian 10-year yields were 5.4 basis points higher at 6.043 percent. A rise towards the 6.5-7 percent area could renew pressure on politicians to come up with bold solutions to the debt crisis, said Norbert Wuthe, senior government bonds strategist at Bayerische Landesbank. "We are pretty sure that sometime during the next month markets would test the willingness of politicians to actually use this instrument (the European Stability Mechanism) and they want to see how efficient it is," Wuthe said. U.S. JOBS REPORT German Bund futures hit three-week highs of 143.52, but room for further gains looked limited as markets were also positioning for a stronger-than-previously-expected U.S. non-farm payrolls report due at 1230 GMT. Two-year German yields were 2.9 basis points lower at minus 0.007 percent, while 10-year yields were 1.1 bps lower at 1.378 percent. A Reuters survey published earlier this week had predicted an additional 90,000 workers on the month, but some analysts have upgraded their forecasts following Thursday's U.S. private sector jobs data that came in much better than expected. Traders said the market was now expecting a number of 100,000 or higher. "As a robust U.S. labour market report could be generally detrimental today, a consolidation seems possible after the substantial gains," analysts at Helaba Landesbank Hessen-Thueringen said in a note, adding their favoured trading range for Bund futures was 142.15-144.00. Having risen past the 61.8 percent retracement of the June sell-off at 143.30, Bund futures were now targeting 144.28 - the 78.6 percent retracement of the same move, Futurestechs technical analyst Clive Lambert said.

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