* Bund futures fall as investors take profit * Investors eye European policy response, U.S. stimulus * Demand seen at relatively small Spanish auction By Ana Nicolaci da Costa LONDON, June 7 (Reuters) - German Bund futures fell on Thursday, extending losses on growing expectations of further U.S. monetary stimulus and hopes of a European policy response to Spain's banking problems that sent the peripheral nation's debt prices sharply higher. Spain's sale of 10-year bonds will test investor appetite for the country's debt at a time when its borrowing costs are not far from unsustainable levels and days after its treasury minister said the country was being cut off from markets. But analysts said Spain should be successful in raising the $1.25-2.5 billion, to be split between three bonds including some with short maturities, largely because of the low target that was set for the auction. The recent improvement in risk sentiment - based on hopes for more central bank stimulus and for some kind of European policy response to Spain's banking problems - also provided a more favorable backdrop for the sale, analysts said. "The auction size is quite small. In this context I think the auction will go OK," Piet Lammens, strategist at KBC said. The Bund future fell 37 ticks to 144.29 as investors continued to take profit on German debt after the contract hit a record high of 146.89 last week. The Bund sold off sharply in the previous session as investors clung to hopes of more monetary easing, even after European Central Bank President Mario Draghi put the onus for crisis resolution firmly on the euro zone's governments. Markets are optimistic about the prospect of further stimulus from the Federal Reserve after Vice Chair Janet Yellen on Wednesday laid out the case for the U.S. central bank to provide more support to a fragile economy as financial turmoil in Europe mounts. Investors will scour Fed Chairman Ben Bernanke's testimony on the economic outlook later in the session for any such clues after data last week showed the unemployment rate rising for the first time in nearly a year. PAIN IN SPAIN Analysts said investors could get worried if Spain, which has funded 56 percent of its planned 2012 issuance under better funding conditions earlier in the year, showed any failure to sell towards the upper end of its target. They would also look at whether the average yield was above those in secondary market and the size of the tail - the difference between the average price and the lowest accepted price - to gauge the quality of the bidding. "I don't expect the cover to be spectacular, on the other hand they are not actually selling very much," Marc Ostwald, strategist at Monument Securities said. "(...) This massive cloud, talk of Spain being on the brink of a rescue package, all of that does not help." Germany and European Union officials are urgently exploring ways to rescue Spain's debt-stricken banks although Madrid has not yet requested assistance and is resisting being placed under international supervision, European sources said on Wednesday. Spanish government bond yields were down 13 basis points at 6.17 percent, while the Italian equivalent shed 9.3 bps to 5.58 percent. "I think yesterday was quite a risk-on day and I think you are just continuing with that same kind of theme. I think people expect something to happen," a trader said. "There is some positive momentum towards it and I think that's causing quite a lot of people to reassess their positions."

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