* Bunds dip on speculation Bernanke may hint at stimulus * Expectations seen overdone, room for correction * Spain tests market with bill sale * Updates to midsession with Spanish auction results By Kirsten Donovan LONDON, July 17 (Reuters) - German Bunds dipped on Tuesday as riskier assets rallied on speculation the head of the U.S. central bank may signal more easing, but with investors wary of euro zone leaders' ability to stem the debt crisis the move should be short-lived. Chairman Ben Bernanke, in testimony before the U.S. congress, is expected to reiterate the Federal Reserve's stance that it will take further monetary stimulus action only if economic conditions worsen. But weak U.S. retail sales and a lower International Monetary Fund global growth forecast on Monday have raised expectations. "People are getting excited thinking he'll hint at (more quantitative easing) but risk assets usually do rally heading into these things," a trader said. Bund yields did not stray far from recent lows, however, with 10-year paper just under a basis point higher at 1.24 percent. September Bund futures were 19 ticks lower at 144.85. "The market is getting ahead of itself, and there's room for reality this afternoon unless (the Fed) do something extraordinary," said Gary Jenkins, director at Swordfish Research. "Even if they are slightly more dovish than expected the market may react in the short term, but it's probably not going to make any medium-term difference. The euro zone will drive the market for the next year or so." With confidence in leaders' ability to stem selling pressure in peripheral debt markets unlikely to increase in coming weeks, safe-haven low-risk assets should remain in demand. Germany's top court said on Monday it would not decide on whether it would block the latest plans for use of the euro zone's rescue fund until September. That means the European Stability Mechanism would not be available to recapitalise banks or intervene in bond markets any time soon - actions Finland and the Netherlands have already said they oppose. "It's difficult to believe that you're going to get a resumption of confidence enough that Spain and Italy are fine for the next five years," Jenkins said. "It's going to take a while for confidence to return to those bond markets whatever happens, unless you see fiscal union." German two-year debt yielded minus 5 basis points and, with Dutch two-year yields also in negative territory, investors have been buying short-dated Belgian, Austrian and French bonds in an attempt to make even modest returns. Belgian two-year bonds were the best performers among short-dated euro zone paper, with yields down almost 5 bps at 0.13 percent. Spanish yields were 8 bps higher at 6.88 percent after rising almost 20 bps in thin trade on Monday, with any lasting respite seen as unlikely and international investors steering clear of the paper on fears the country will ultimately need a full sovereign bailout. Although the country's borrowing costs dipped from a month ago at a 3.5 billion euro bill sale, they remained high by historic standards. The auction was the first since Spain announced more austerity plans last week and was an early test of sentiment before a 3 billion euro bond sale on Thursday where bonds with maturities up to 7 years will be on offer. "The backdrop for short-term paper in general... has clearly improved, and this includes bills but also short-term bonds," said Commerzbank strategist Rainer Guntermann. "It would be too early to conclude that this is a positive for the bond auction...the environment remains fairly fragile and vulnerable to general swings in risk-on/risk-off mode. He added that the auction should go smoothly given Spain's decision to issue short- and medium-term bonds but said longer-term sales remained difficult. Signs that German analyst and investor sentiment began to stabilise in July after falling sharply for the last two months also kept the pressure on Bunds.

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