* Euro zone manufacturing slips further into decline * Bund hits record high before Spanish sale, election weekend * Bund tests key resistance level By Ana Nicolaci da Costa LONDON, May 2 (Reuters) - German Bund futures hit record highs on Wednesday after euro zone manufacturing data raised concerns that the euro crisis is spreading to the region's key economies. The euro zone's manufacturing sector slipped further into decline last month as a downturn that started in the periphery appeared to take root among core members France and Germany, a survey showed on Wednesday. Five-year German bond yields hit an all time low of 0.58 percent and ten-year yields also fell to a record low of 1.628 percent, according to Reuters data. "It is a huge issue, the (fiscal) tightening that is happening in Europe. Obviously they need to improve budget deficits and (so on), it's not as if they can get away without it, but it's the sole focus on that which is the problem," said Elisabeth Afseth, fixed income analyst at Investec. "When you get this sort of austerity in the large countries such as Spain and Italy, it is very hard to see that it doesn't have a spillover effect into (growth of) the core countries as well." German Bunds hit a record high of 141.54 having opened lower on the day after data showed U.S. factory activity grow at its strongest rate in 10 months in April. Markit's Eurozone Manufacturing Purchasing Managers' Index (PMI) dropped to 45.9 from 47.7 in March - its lowest reading since June 2009. It has been below the 50 mark that divides growth from contraction for nine months. Germany's manufacturing sector shrank at the fastest pace in nearly three years in April while French manufacturing shrank for a second month in the same period in the latest sign that the euro zone debt crisis is taking a toll on the region's largest economies. Italian debt yields reversed an early fall after data showed the country' manufacturing sector shrank by more than expected in April. Ten-year yields were up 3.7 bps at 5.58 percent. Spanish 10-year government bonds underperformed their Italian counterparts ahead of the country's widely anticipated bond auction. Yields were up 10 bps at 5.87 percent. The euro zone's fourth largest economy, the current focus of the debt crisis, will sell three- and five-year bonds on Thursday at Spain's first auction since its sovereign credit rating suffered a two-notch downgrade last week. "Where do we strike the yield on a relative basis ... will the yield basically be through the market levels at the time? That's going to be the key metric for it," Monument Securities strategist Marc Ostwald said. EVENT RISKS Investors were seeking safety before the Spanish auction and a European Central Bank policy meeting on Thursday, and Greek and French elections over the weekend. They will also look to U.S. jobs data on Friday to see whether its labour market picture is rosier after factory data bolstered the outlook for the world's largest economy. UBS technical analyst Richard Adcock said earlier that a break above 141.37/38 - the previous record - would be the next bullish signal for the Bund, opening the way for 141.56 and then the 200 percent extension level at 144.04. But some analysts say Bunds are looking very expensive at current levels. "As we are at very high levels, we have a tendency to be negative on the Bund. Not so much on a longer-term perspective, but we think the upside has very little value any more," Piet Lammens, strategist at KBC, said.

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