* Bunds edge above 144.17 resistance * Italy in focus one day before challenging auction * Spanish bonds under pressure on news flow By Ana Nicolaci da Costa LONDON, Aug 29 (Reuters) - German Bund futures struggled on Wednesday to decisively break through key resistance levels on with uncertainty over the European Central Bank's bond-buying plan leaving market players searching for direction. Italian bond prices cheapened in early trade before a sale of 5- and 10-year bonds on Thursday but had stabilised by the middle of the trading session. The country's 2-year borrowing costs fell nearly 2 percentage points at an auction on Tuesday, benefiting from the prospect of ECB intervention which is expected to focus on the front-end of the curve.. A sale of up to 6.5 billion euros of longer-dated debt on Thursday could prove more challenging. "It's going to be certainly an interesting litmus test," Richard McGuire, senior fixed income strategist at Rabobank said. "One would have always expected (Tuesday's) sales to go well given their short-dated nature and the speculation of ECB intervention in the front end of the peripheral curve ensuring a bid for paper there. The 10-year issuance we see in Italy tomorrow will provide a more important barometer in terms of market thinking." Nerves before the auction helped underpin German Bunds at the expense of riskier peripheral debt, but trade was choppy. Ten-year Italian yields and 5-year yields were little changed at 5.83 percent and 4.79 percent respectively. German Bund futures edged above what traders said was a resistance level at 144.17 - the 62 percent retracement of the July-August sell-off - but last stood up 20 ticks at 144.16. "Generally it is pretty quiet, but such a rise is normal when you have BTP (Italian bond) supply tomorrow," one trader said. ECB LIMBO Ten-year Spanish government bond yields rose 3.9 basis points to 6.54 percent, with other maturities also under pressure one day after more negative headlines. Catalonia, which represents about a fifth of the country's economy, said it needed a rescue just as data showed the economy falling deeper into recession and depositors pulling money out of their banks. "All in all the domestic banks look to be in a weaker position in terms of providing funding to the sovereign, which in turn increases pressure on the sovereign to accept a more comprehensive bailout," McGuire added. European Central Bank President Mario Draghi's signals of possible intervention have left investors in suspended animation. The peripheral bond rally has gone as far as it can without specifics on the timing, size and details of possible bond-purchases, some analysts say. The ECB said on Tuesday Draghi would not attend the annual Jackson Hole meeting of central bankers at the end of this week due to a heavy workload as he gears up for the Sept. 6 meeting. "It's marginally worrying that Draghi has pulled out of Jackson Hole meeting. It might be some indication there is still considerable work to be done before they meet next week," Elisabeth, Afseth, fixed income strategist, at Investec said. Investors will also remain cautious before Federal Reserve Chairman Ben Bernanke's speech on Friday, looking for any hints the bank could embark on a third round of quantitative easing. But any reaction to Bernanke could be limited before the ECB meeting. "If the ECB delays unveiling the details of its bond-purchasing programme (beyond Sept. 6), then risk markets may sell off and Bunds would benefit and may retest September contract highs of 146.26," said Piet Lammens, strategist at KBC. "But we think that level is a strong resistance and we don't expect it to be broken. Therefore it would be a good opportunity to sell the Bund."

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