* Bunds rebound after falling nearly 3 points since ECB * Bund sale seen decent despite recent risk improvement * Spanish, Italian yields rise after sharp fall By Ana Nicolaci da Costa LONDON, Aug 8 (Reuters) - German Bund futures recouped some ground before a sale of 10-year bonds which is expected to attract demand, particularly after a recent sell-off cheapened the paper. Germany will sell 4 billion euros of July 2022 bonds later in the day, the only auction out of the euro zone this week. Investors will have to weigh the recent improvement in risk sentiment due to the prospect of eventual European Central Bank intervention against uncertainty regarding the details of any action, most importantly the sizes involved. They will have to decide whether the slight pick-up in yield is enough to lure investors back into bonds which historically are still offering very low returns. "It's an environment that still is reasonably favourable (for safe-haven debt), the outright yield is reasonably high relative to what we have seen over the past few weeks and we still need more colour in terms of the latest rescue efforts," said Orlando Green, European fixed income strategist at Credit Agricole. German Bund futures rose 14 ticks to 142.47, after falling almost three full points since last Thursday's European Central Bank policy meeting. Ten-year German bond yields were 1.4 basis points lower at 1.46 percent - compared to a record low of 1.126 percent hit in July. Commerzbank expected the 10-year yields to have a bit further to run before investors bought back in. "We feel that 10-year Bunds may well have another 10 basis points to correct towards the 1.55-60 percent area, before finding a firmer bid again," the bank said in a research note. REALITY CHECK The sell-off in the Bund and rally in Spanish and Italian bonds have been driven by the ECB's pledges to eventually buy bonds in tandem with the euro zone rescue fund to curb borrowing costs in peripheral countries. But the fact that this will not be done before September and only on condition that the likes of Spain ask for help from the EFSF first, leaves the market vulnerable to volatility during this one-month limbo, analysts say. "I don't think it's a massive start of a bear trend (in the Bund). It depends a little bit what the full package from the EU and ECB is," Elisabeth Afseth, fixed-income analyst at Investec said. "I would remain cautious. I wouldn't recommend anyone to go in and load up on Spanish debt as of yet." Ten-year Spanish government bond yields rose 5 basis points to 6.95 percent - near the 7 percent danger level beyond which funding costs are perceived to be unsustainable. Equivalent Italian yields were up 3 basis points at 5.99 percent. Two year Spanish bonds yields rose 21 bps to 3.77 percent and two-year Italian yields increased 7 bps to 3.35 percent - but both remained below the 4 percent mark. Credit Agricole's Green said the sovereign debt market was likely to lack clear direction until further details emerged on any potential intervention, something he did not expect for at least another couple of weeks. "Volatility is pretty much likely in this environment, when we have thin markets without much volume in terms of information flow," Green said.

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