* Short-dated Spanish, Italian yields fall on ECB expectations * Merkel's pro-Draghi comments underpin riskier markets * Bunds reverse losses in choppy trading By Ana Nicolaci da Costa LONDON, Aug 17 (Reuters) - Short-dated Spanish and Italian yields fell on Friday as traders grew fearful of being caught off guard with selling positions, given the potential for policymakers to make fresh attempts to resolve the euro debt crisis once the holiday season ends. Expectations of European Central Bank intervention have remained rife since the latest monetary policy meeting in August, even though any bond-buying would be subject to Spain and Italy asking euro zone rescue funds for help first. Traders said distortions in the repo market were also feeding through to the cash market. Bund futures, which have fallen more than 3 full points since ECB chief Mario Draghi said in London the bank would do whatever was needed to preserve the euro, were expected to be driven by technical factors until September. "The Bund is currently a very technical market. What is for me more important is the behaviour of the front end of the peripheral curve, particularly of the Spanish curve," Peter Schaffrik, head of European rate strategy at RBC Capital Markets said. "In general, I think the market is so short, I think going into the ECB meeting, people are scared (of holding on to those positions)." The ECB announces its next policy decision on September 6. Two-year Spanish government bond yields fell 18 basis points to 3.75 percent, while the five-year equivalent eased 19 bps to 5.43 percent. Ten-year yields fell 9.5 basis points to 6.48 percent. Two-year Italian yields fell 12 bps to 3.17 percent, but 10-year yields were up slightly at 5.82 percent. "It's very difficult to run a short position in this market because the yields are already so high and could potentially come in such a long way. Even if you don't like the market you almost feel compelled to buy it," one trader said. MERKEL COMMENTS Riskier assets were underpinned on Friday after German Chancellor Angela Merkel voiced support for the European Central Bank's crisis-fighting strategy, underscoring attempts by policymakers to show a united front. But mixed messages from Finland and comments from Austria's foreign minister implying Greece should be kicked out of the euro zone underlined the political challenges the region still faces. Finland is "100 percent committed" to the euro, its European Affairs minister said on Friday, after the country's foreign minister said Finnish officials have prepared for the currency's possible collapse. Ten-year German government bond yields were down 1.6 basis points at 1.51 percent although technical charts suggested the grind higher had a bit further to run, analysts said. "With this 1.50 percent taken out, I wouldn't be surprised to see 10-year Bund yields edging a bit higher towards 1.60-65, not necessarily today but that would be an intermediate target for next week," Rainer Guntermann, strategist at Commerzbank said. "At that level, they should start to look a little more attractive ... going into September." Credit Suisse technical analysts saw an immediate bearish bias for German debt towards 1.63 percent in the yield and expected fresh buyers only at 1.69-1.70 percent. Bunds reversed earlier losses to trade up 25 ticks on the day at 142.02. after breaking through a key resistance level at 141.80, according to one trader. Credit Suisse looked for further weakness to 140.18 - a 200-day moving average.

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