* Markets hit by uncertainty over future ECB intervention * Spanish short-term yields rise * Growth worries partly offset by central bank action bets By Marius Zaharia LONDON, Aug 13 (Reuters) - Short-term Spanish government bond yields rose slightly on Monday, with some investors expecting Madrid's debt crisis to worsen before policymakers make any move to lower its borrowing costs. Prospects of the European Central Bank resuming purchases of short-term Spanish and Italian bonds next month pushed Spanish two-year yields as low as 3.2 percent last week, but they have since pulled back up by around a point. On Monday, Spanish two-year yields were 12 basis points higher on the day at 4.18 percent, still some way off levels above 7 percent seen last month before the ECB signalled it may intervene in bond markets again to lower borrowing costs. The ECB's condition that troubled countries need to activate the euro zone's rescue mechanisms and accept supervision carries the risk that Spain's short-term yields could go back towards unsustainable levels before Madrid asks for help. "The question when and under which conditions Spain will ask for financial support is keeping everyone in the dark," Rabobank senior market economist Elwin de Groot said. "You could argue that at these levels the pressure for Spain has eased and ... you would at least expect yields to go back up again. Whether that should be to levels seen in July I don't know though, because there is a threat that at some point the ECB will intervene." Societe Generale rate strategist Ciaran O'Hagan said there was value in short-term Spanish debt on a two-month horizon, but that prices may become more attractive in coming days due to uncertainty over the conditions Spain would have to meet to receive help. "In the end there will be an agreement, because the alternative is rather bleak," O'Hagan said. ITALY OUTPERFORMS SPAIN Italian two-year yields rose 5 bps on the day at 3.50 percent. The bonds have outperformed their Spanish counterparts in the past week, with the yield differential widening by some 45 bps to 68 bps. Finance Minister Vittorio Grilli told a newspaper Italy would not meet its 2012 deficit target but planned no extra budget cuts because it was on track to meet its EU obligations. Markets took that in their stride, given that Italy's budget deficit remains among the lowest in Europe. "The problem for Italy is the contagion risk more than anything else," Rabobank's de Groot said. "Market liquidity may also have an impact (leading to Italy's outperformance over Spain), as Italy is still one of the more liquid markets in the euro zone." The difference between what buyers wanted to pay for Spanish two-year bonds and what sellers wanted to receive -- an indication of trading volumes -- was more than 100 cents, double the spread in Italy and among the widest seen this year. German Bund futures were 10 ticks higher at 143.50, having rallied on Friday on the back of weak Chinese and euro zone economic data. But investors are wary that a bleak economic outlook may lead to more central bank stimulus measures. Late on Friday, the president of the San Francisco Federal Reserve, John Williams said the U.S. central bank should launch a fresh round of bond-buying to lower the unemployment rate more quickly..

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