* Spain rallies, 10-year yields hit four month low sub-6 pct
* Mood positive on peripheral debt despite hurdles ahead
* Safe-haven bids for Bunds diminished, eyes on U.S. data
By William James
LONDON, Sept 7 (Reuters) - Spanish 10-year bond yields fell below 6 percent for the first time since May on Friday as an ECB plan to buy government debt was seen as a first step towards restoring faith in the euro zone's ability to tackle its debt crisis.
European Central Bank chief Mario Draghi on Thursday committed the bank to potentially unlimited buying of bonds with maturities of up to three years, albeit with tight conditions, i n a landmark step toward addressing the crisis, which is threatening Spain's ability to fund itself.
Spanish 10-year yields fell the furthest on Friday and were last at 5.76 percent, down 32 basis points, having fallen from more than 7.5 percent in July.
Yields on two-year Spanish bonds, within the scope of the ECB plan, fell by 6 bps to 3.00 percent with traders saying they had limited room left to rally, having already tumbled from around 7 percent over the last six weeks.
"It's driving confidence through the market. You see the rally extending to longer maturities whereas in previous times the rally was concentrated on the short end," said Alessandro Giansanti, strategist at ING in Amsterdam.
Previous attempts to solve the crisis by buying bonds or pumping banks full of cheap cash had limited impact on longer-dated debt as investors remained sceptical, but the scale of the ECB's latest commitment has fuelled greater optimism.
Italian, Portuguese and Irish bond yields also fell, and the greater appetite for risk, and higher returns, saw French and Belgian debt outperform German Bunds - the region's lowest-yielding, least-risky assets.
Nevertheless, whether those gains can be sustained in the medium term will be the true measure of the plan's success.
The ECB tied strict terms to any future bond purchases, meaning Spain would have to agree to conditions with the European rescue fund before bond buying could begin.
Spanish Prime Minister Mariano Rajoy appeared in no rush to seek a bailout on Thursday, potentially leaving markets in limbo and denting the positive mood.
"There's a lot in the price and Spain and Italy show no signs of asking for help - so how does that work?" a trader said.
SHOW THE MONEY
Although the verbal commitment to bond buying was welcomed, the dire economic situation in Spain, and Italy, means that to maintain low yields, the central bank would have to follow through on its word by purchasing debt.
"(In Spain) on the budget side and the macro side we will not have very positive data in the coming months, so I really see that to have a continuation in this move we will need to see a programme activated," ING's Giansanti said.
The Bund future was 48 ticks lower on the day at 139.69, having fallen by more than a point on Thursday as the ECB plans cooled demand for safe-haven assets, and after better-than-expected U.S. data.
Alongside the performance of peripheral euro zone debt, the direction of core markets will be determined by U.S. payrolls data on Friday, which will be watched for clues as to whether the U.S. Federal Reserve is likely to launch fresh stimulus measures.
"We've got non-farms coming up where people are expecting a firm number. This sell-off doesn't look like abating any time soon, and it's tricky to stand in the way of it," a second trader said.
The non-farm payrolls report due at 1230 GMT was forecast to show the addition of 125,000 jobs in August.
