* Spanish yields mixed as aid nerves keep market on edge * Madrid's debt sale beats target but yields remain high * Bunds gain, low rate environment supportive By Marius Zaharia and William James LONDON, Sept 18 (Reuters) - Uncertainty over when and if Spain will seek a bailout fuelled volatility in its debt markets on Tuesday and lifted safe-haven German Bunds from the five-and-a-half-month lows hit in the previous session. The European Central Bank made a landmark pledge earlier this month to carry out unlimited purchases of bonds issued by troubled euro zone states, in what was seen as a major step towards addressing the region's three-year-old debt crisis. But a condition of the support was that a country must first make a request for aid from the region's rescue funds, and Spain has so far appeared reluctant to take action it fears could involve a loss of sovereign control over its own accounts. "The pressure is coming on Spain to get into a programme and (Prime Minister Mariano) Rajoy looks like he's dragging his feet a bit and that's hurting risk sentiment in general and giving a bid to Bunds," one trader said. Bund futures were last half-a-point higher on the day at 139.50, with 10-year cash yields down 4.7 basis points to 1.60 percent. Ten-year Spanish yields were down 7 basis points on the day at 5.94 percent, but two-year yields , which would be among the targets of potential ECB forays, were slightly higher on the day at 3.42 percent, having traded in a 3.39-3.54 percent range over the session. Before the first signals of the ECB plan emerged in late July, two-year yields traded above 7 percent. The August-September rally briefly took them below 3 percent. "We're now in a waiting game, waiting for stronger signals from Spain ... the plan will only really work if Spain signs up to some form of credit line agreement," said Rabobank senior market economist Elwin de Groot. "The short end of the curve has already almost fully priced in this scenario, the risk there now is in the short term we see a deterioration in those markets." The prospect of an ECB bond purchase programme helped to lower yields at a smooth sale of short-term bills, which raised slightly more than the target amount but borrowing costs remain well above Spain's euro zone peers. BUND YIELDS ANCHORED While uncertainty may pose a threat to the recent gains made by Spanish bonds in coming days, the outlook for low-risk assets looked better anchored. Even in a scenario where Spain activates the ECB bond-buying and peripheral debt rallies, Bund yields were unlikely to rise far beyond their recent peak of 1.7 percent while interest rates in the currency bloc remain low, market participants said. "The bottom line is that (the ECB plan) is a step in the right direction but it's one small step of many, it's going to take a long time. Given we're in a low-rate environment, yields aren't going to go through the roof," a second trader said. ECB policymaker Luc Coene said on Monday the bank could cut its main interest rate, put its deposit rate into negative territory and offer banks a new round of ultra-cheap funding if needed. On technical charts, the rise in Bunds inched above the 139.42 Marabuzo resistance line - the midway point of Friday's steep selloff - providing a 'buy' signal according to Futurestechs analysis.

Source