* Bunds rise after biggest daily fall since Oct 2011 * Spain, Italy hold onto debt gains on ECB promises * 10-2 Spanish yield gap at widest in euro-era * Curve steepeners seen profitable in Spain and Italy By Ana Nicolaci da Costa LONDON, Aug 6 (Reuters) - German Bund futures rose on Monday as dealers bought back into the market, cheapened after a sharp sell-off, even as Spanish and Italian government bonds continued to benefit from the prospect of eventual European Central Bank intervention. Bund futures saw their biggest daily fall since October 2011 on Friday following better than expected U.S. data and as investors overcame initial disappointment that the ECB's monthly policy meeting did not approve an immediate return to outright bond-buying. ECB President Mario Draghi outlined a plan to buy debt in cooperation with the euro zone bailout funds - but not before September - and only if countries ask to use the funds and accept strict supervision. In the mean time, trade was likely to remain vulnerable to political headlines, and price moves could be exacerbated by liquidity thinned by summer holidays in Europe, analysts said. "I guess everybody is keeping their positions (minor) because we are seeing rollercoaster moves that nobody can explain," Charles Berry, trader at Landesbank Baden-Wuerttemberg said. "Volatility will be high, that's the only thing I can guarantee." Bund futures were 35 ticks higher on the day at 143.30, having fallen more than 200 ticks at one point on Friday. The ECB's conditional pledge suggests the situation in Spain may have to deteriorate and borrowing costs rise further before the country seeks aid, opening the door for ECB intervention, according to some analysts. That backdrop could favor a sale of 10-year German debt on Wednesday, even if yields in the secondary market remain near historical lows. Ten-year German bond yields were down 6.6 basis points at 1.36 percent - not too far from a record low of 1.126 percent hit in July. "The sell-off on Friday was a little bit overdone," a second trader said. "People saw that as an opportunity to get long again." Spanish borrowing costs over 10 years came off euro-era highs last week but held close to the 7 percent danger level. Prime Minister Mariano Rajoy signaled for the first time on Friday that he may seek a full-blown aid package but said he had not yet made a decision on the matter. Spain has time to wait for clarity on what such aid would involve because it has already covered the majority of its debt needs for the year, Economy Minister Luis de Guindos said in a newspaper interview published on Sunday.PROFITABLE STEEPENERS Spanish government bonds extended Friday's rally, with gains bigger in the short-end, where Draghi said the ECB would focus potential intervention. Ten-year yields remained close to levels beyond which funding costs are deemed unsustainable. "I don't think Rajoy has an intention to start the (aid process) now. This bond-buying will not occur in the short term and I don't think in August we will see any request from Spain asking for help, so I am not sure how much this rally can continue from here," Matteo Regesta, strategist at BNP Paribas said. Ten-year Spanish government bond yields fell 10 basis points to 6.81 percent, while two year yields were down more sharply at 3.56 percent. The yield spread between the 10-year and two-year paper hit its widest level in the euro era at 328 basis points. "We've seen some short-covering in Bunds after the sell-off last week, whereas the periphery is driven by what Draghi said - that he will focus on short-dated (bonds)," a third trader said. "There are flows into two- and three-year bonds, but not into the 10-year. However there are no sellers in the 10-year either." Ten-year Italian yields were down 1 bp at 6.06 percent, while the two-year equivalent eased 16 bps to 3.11 percent. Regesta said steepeners - or bets that short-dated bonds would rise faster than long-dated ones - were the position to take in the Spanish and Italian curves. "We like 2-5s, 2-10s steepeners because they can perform I think very well both in a bullish and a bearish market," Regesta said. Italy played down any prospect of it asking for help. Bank of Italy Governor Ignazio Visco and Cabinet Undersecretary Antonio Catricala said on Sunday the country does not at the moment need to ask the euro zone's rescue funds to buy its bonds in the market.

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