* Bunds choppy in thin volumes, more volatility expected * Investors weigh up safety with burden on Germany from crisis * Bunds underpinned by lower European stocks By Ana Nicolaci da Costa LONDON, July 26 (Reuters) - German Bund futures rose in choppy trading on Thursday as investors balanced their safe-haven appeal against the prospect that Germany will suffer whatever the outcome of the euro zone debt crisis. A sharp rise in Spanish borrowing costs this week showed the euro zone debt crisis was escalating - a development that should underpin demand for safe-haven assets. But a warning on Germany's credit rating has served as a reminder that it is not immune to the crisis, as its economy also feels the impact of the regional troubles. "We are already at extremely low levels for the Bund (yields), so a lot of investors pose themselves this question, are these levels sustainable and for how long?" Elwin de Groot, senior market economist at Rabobank, said. "As pressures build a solution also comes closer and then investors again ask the question what will happen with Bund yields if there is a solution?" Bund futures were up 27 ticks on the day at 144.96, while 10-year cash yields were down 2.8 basis points to 1.24 percent. The Bund's rise came after three consecutive days of losses and the contract was poised for its first down week in five. Richard Adcock, technical analyst at UBS, said in a note the Bund was still in corrective mode and that any sell-off would be temporary. "Weakness should continue to be viewed as limited before the long term bullish themes are resumed and new highs posted," he said, recommending targeting the long-term extension level at 147.74. Yields on Spanish and Italian bonds dipped, a day after reported comments by European Central Bank policymaker Ewald Nowotny that giving Europe's permanent rescue fund a banking licence to boost its firepower had merits. While such a step has repeatedly been rejected by his ECB colleagues, the comments suggest officials may be open to the idea, providing markets looking for more central bank action with some reassurance. Ten-year Spanish government bond yields were flat at 7.39 percent while the Italian equivalent was up slightly at 6.46 percent. CENTRAL BANKS Before ECB and U.S. Federal Reserve policy meetings next week, speculation further action may be taken has been in the air though analysts thought authorities were more likely to signal further easing rather than act in the coming week. While only seven in a Reuters poll expect the ECB will cut the refi rate by 25 basis points for a second month in a row in August, the survey showed a clear majority - 44 out of 69 - expect it will do so before 2013. Fed Chairman Ben Bernanke last week offered a gloomy view of the U.S. economy's prospects, but provided few concrete clues on whether the central bank was moving closer to a fresh round of monetary stimulus. Such talk could limit gains in Bund future before the meetings, favouring equities instead. "We've had quite a few sell-offs in the last couple of days, so there's a little bit of consolidation with supply out of the way," a trader said. Italian yields edged lower after an auction of two-year zero-coupon paper. The Italian Treasury managed to sell the maximum amount targeted, but yields at the auction hit an eight-month high. Price moves were exacerbated by volumes thinned by summer holidays in Europe and as the London Olympics gets under way at the end of the week. "It's thin, it doesn't take much to move stuff. A lot of people are away, much of that could get worse over the Olympics. Volatility could increase and volumes could go down in the next couple of weeks quite notably," a second trader said.

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