* Italy, Spain yield curves steepen on Draghi comments * Bunds fall; Moody's move on EU ratings also weighs * Uncertainty over scale of ECB action curbs sharp market moves By Emelia Sithole-Matarise LONDON, Sept 4 (Reuters) - Spanish and Italian bond yields fell while demand for safe-haven German Bunds cooled on Tuesday with investors expecting the European Central Bank to give details this week of a new plan to tackle the euro zone debt crisis. Speculation over the scope of a potential ECB bond-buying scheme grew after President Mario Draghi was quoted late on Monday as saying ECB purchases of sovereign bonds with maturity of up to three years would not breach European Union rules against directly financing euro zone economies. Short-dated Italian and Spanish debt yields led the falls in peripheral bonds but traders said an acceleration of the move was unlikely before the ECB's meeting on Thursday given uncertainty over the size of the bond-buying scheme. Questions also remained over whether ECB policymakers will unanimously back the scheme, opposed by the head of Germany's influential Bundesbank, Jens Weidmann. "Markets are taking a bit of confidence from Draghi who apparently indicated that purchases of up to three years maturity wouldn't be in contravention of EU policies on financing of sovereigns despite the continued uncertainty," said Brian Barry, a strategist at Investec. "There's scope for further steepening of Italian and Spanish curves but we haven't seen the colour of the ECB's money and given questions over what exactly is going to come out of the ECB meeting, it's difficult to say how far it will go." Spanish two-year yields dropped to a three-week low of 3.23 percent as investors welcomed Draghi's comments, while their Italian counterparts fell 26 bps to 2.45 percent. The cost of insuring against Spanish and Italian defaults also fell sharply. Spanish 10-year bonds fell a more modest 9 bps to 6.80 percent with Italian counterparts 6 bps lower at 5.73 percent. RBS strategists affirmed their target of Spanish 2-year bonds falling to 2.20 percent in coming weeks on the back of ECB intervention. "This is risk-on as the probability of an error by the ECB in buying only very short end paper has receded and we remain comfortable holding longs in two-year and shorter-dated Spanish bonds," RBS strategist Harvinder Sian said. ECB FLEXIBILITY IN QUESTION While Draghi's comments on the maturity of bonds the ECB could target was a relief for investors who had been bracing for only treasury bill purchases, Commerzbank strategists said implicitly prohibiting purchases beyond three years limited the flexibility of such a scheme. "In case the debt crisis deteriorates further, requiring the ECB to move further out the curve, this will be very difficult to justify without sacrificing the ECB's credibility altogether," they said in a note. The cautiously upbeat tone in peripheral euro zone bonds and a warning by Moody's that it may downgrade the EU's Aaa rating if it decides to cut the ratings of the region's four biggest budget backers - Germany, France, UK and Netherlands - kicked Bunds down. Bund futures were last 30 ticks down at 143.25 with German 10-year yields up 3 bps at 1.41 percent but traders saw little impetus for a sharp sell-off before the ECB meeting on Thursday. "People are waiting to see the whites of the eyes of the ECB and you've got some supply this week from Spain to get through so I don't see markets racing away from here," a trader said.

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