* Italian bonds under pressure after auctions * Bunds rise in choppy trade * Debt crisis worries support safe-haven Bunds By Kirsten Donovan LONDON, March 27 (Reuters) - Italian bonds came under pressure on Tuesday in the wake of an auction of inflation-linked paper which traders said had left dealers struggling to offload the debt. Italy sold 2.8 billion euros of two-year zero coupon bonds, with yields falling to their lowest since November 2010, and 1 billion euros of the inflation-linked bond. Italy auctions up to 8.5 billion euros of medium- and longer-term debt on Thursday. "The market is definitely running a bit heavy after the auction and BTP futures have come off," a trader said. "Dealers were pushing the prices up for clients." Another said the post-auction price action suggested dealers were left holding a lot of the inflation-linked paper and were trying to sell it on. Italian BTP futures were 38 ticks lower on the day at 104.89 and Italy's benchmark 10-year bond price dipped below par. Yields on the paper were 4 basis points higher at 5.08 percent. The pressure on Italy helped Bunds establish themselves firmly in positive territory after a choppy start to the day. "It's a bit fuzzy at the moment with no clear direction and it seems we will continue to trade the recent range," DZ Bank rate strategist Michael Leister said. "From a purely technical perspective the risk is that Bunds move lower but it remains very difficult to time these mood swings and for now the only constant is the volatility." June Bund futures were 17 ticks higher on the day at 136.91, after hitting a session high earlier of 137.21. "It's due to the Italian auction, the result was not that good. We've got end-month index extension on top of it and positive cash flows ... all in all we have a bullish picture," one trader said. Technical factors are also a big driver in a week lacking important economic data and with no major developments in the euro zone debt crisis in view. Bund futures failed to hold above the 23.6 percent retracement levels of March's rally at 137.14 on Tuesday, but equally failed to sustain a move below the 38 percent retracement at 136.79. Any break of the latter could see the market ultimately test March's lows of 135.27. Ten-year yields were 3 bps lower at 1.93 percent, around the middle of this year's 1.75 to 2.12 percent trading range. Benchmark German yields are not expected to rise much although a new trading range just above 2 percent - a level that has proved hard to break sustainably this year - is possible. Any rise is likely to be capped by fears that the euro zone debt crisis could again escalate, with concern focused on Spain's ability to meet tough budget targets. European Union finance ministers meet on Friday and are expected to discuss how to create a firewall big enough to protect Spain and Italy should the debt crisis flare again . The prospect of an expanded firewall helped Portuguese bonds and the 10-year spread over Bunds narrowed below 1,000 basis points for the first time since early September. Despite the pervasive concerns over Spain, Italian bonds have underperformed this week ahead of a busy few days of issuance and with investors anxious about the government's ability to push through labour reforms in the face of stiff resistance from unions. But they have still been among the best performers in the first quarter, returning around 12 percent, according to the Markit iBoxx index, helped by huge cash injections from the European Central Bank's three-year funding operations.

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