* Markets weigh ECB rate cut chance, German debt slips * Solid five-year German auction shows underlying demand * Spain yields edge lower as momentum for bailout grows By William James LONDON, June 6 (Reuters) - German Bund futures fell on Wednesday with the near-term outlook hinging on whether the European Central Bank cuts interest rates to help counter an economic slowdown, though expectations of monetary easing from the bank were limited. A run of grim economic data and rising tension in financial markets over Spain's fragile banks and Greece's uncertain euro zone future has led markets to price in an outside chance that the ECB will lower rates. "I can't really see anything of huge substance coming out of this meeting, but I think some in the market can. There's probably people out there thinking about a huge selloff in Bunds if (the ECB) does something very significant," said Lyn Graham-Taylor, strategist at Rabobank in London. However, most economists in a Reuters poll expect the central bank to hold fire - an outcome that analysts say could disappoint those positioned for a cut and revive appetite for ultra-low yielding, but safe and liquid German debt. Dovish language from the ECB, signalling a rate cut may be on the way in the coming months, would limit the extent of any rebound in Bunds, analysts said. Bund futures were 50 ticks lower at 145.26, falling further from record highs of 146.89 hit on Friday. German bond yields hit record lows across the curve last week as the nervousness over Spain's finances prompted a surge in demand for less risky assets. That solid underlying demand was evident at Germany's 3.98 billion euro auction of five-year bonds, where bidding was strong despite a record low auction yield of 0.41 percent. "I don't think there is much desire to enter short positions at the moment, merely to trim some long positions, hence this auction is being relatively unaffected by the selloff we've seen so far this week," said Credit Agricole strategist Peter Chatwell. As some in markets look to central banks for more action to ease the euro crisis and bolster a faltering global economic recovery, Federal Reserve Chairman Ben Bernanke's testimony before Congress on Thursday will also be closely watched. "If we get some action from either of the two, the ECB or the Fed, the markets could extend the fall (in yields) we've seen. Fundamentally where Bunds and Treasuries are right now is not sustainable," said Chris Becker, market strategist at inter-dealer broker Tradition. BAILOUT HOPES GROW Appetite for risk has crept back in so far this week as markets take stock of the growing momentum behind calls for an international bailout for Spain's banks that does not put extra pressure on the government's finances. "The market seems have the opinion that there will be a solution, even if it doesn't know exactly what that solution will be ... that's what is pushing Spain's yields down," said Achilleas Georgolopoulos, strategist at Lloyds Bank. Spanish 10-year bond yields were 3.3 basis points lower on the day at 6.28 percent, extending this week's fall to around 25 bps. Spain's treasury minister said on Tuesday that the country was losing access to funding markets, and that the European Union should help to recapitalise its banks. Any decision on how to help Madrid shore up its banks is likely to have to wait until the first phase of an independent banking audit is completed later this month, sources said.

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