* Fitch rates Spain worse than Ireland, 2 notches above junk * Spanish bond yields, safe haven German Bunds rise * Tensions to rise next week before Greek elections * Spain said to make bank aid request this weekend By Marius Zaharia LONDON, June 8 (Reuters) - Spanish government bond yields and prices of safe-haven German debt rose on Friday after Fitch slashed Spain's credit rating by three notches, complicating Madrid's quest to overcome its banking crisis. Two European Union sources and one German source said Spain was expected to make an aid request for its banks this weekend and a conference call of euro zone finance ministers on Saturday will discuss the details. Bond trading ranges were expected to remain tight in the next few days as markets believe a broader policy response to the euro zone's debt problems may also be in the works. "Markets are looking at what's going on on the political agenda, that's what's really going to be the (driver)," Credit Agricole rate strategist Orlando Green said. "If you see a (European) agreement to recapitalise the banks then you will see the market moving accordingly and Fitch as well." Spanish 10-year government bond yields last traded 5 basis points higher on the day at 6.16 percent, having fallen to 6 percent on Thursday after a bond sale that went better than expected. Fitch cut its rating on Spain's government debt to BBB, two notches short of 'junk' status, and placed the country on negative outlook, citing contagion risks from the Greek crisis. On Fitch's scale, this places Spain one notch above Cyprus and one below Ireland, which is under a bailout programme and shut out of debt markets and whose 10-year yields trade at more than one percentage point above their Spanish equivalent. Markets are likely seeking more clarity about what the rescue plans for Spanish banks are going to look like before deciding whether the Spanish and Irish bond yield curves should converge or not. "The downgrade was not totally out of the blue, it's been on the cards and you have to remember we are at fairly wide levels in yields anyway," one trader said. "But with this talk about bailouts, it could still get nasty." The key is going to be whether Spain will have to shoulder the burden of saving its banks alone or whether the euro zone partners will agree to share it. The option of direct aid from the region's rescue funds, which markets would likely welcome, looks unlikely at this stage. "Do you really think that's going to happen?," said Peter Allwright, head of absolute return on rates and currency for RWC Partners, a $4 billion fund that no longer owns Spanish debt. He noted Germany has always opposed that solution. "I don't think that's a good sign ... it's getting quite critical, it's a very fragile situation." 'ALL ABOUT JUNE 17' Bund futures were 68 ticks higher on the day at 143.74, with 10-year cash yields 7 basis points lower at 1.314 percent. UBS technical strategist Richard Adcock said the futures were more likely to rise than fall while trading above 142.52, the low hit on May 25. Their next target was 144.26, the mid-point of their latest sell-off. Barring any surprise policy announcements, market tensions are likely to increase further next week. Austerity-fatigued Greeks head to the polls again on June 17, in an election that many fear may lead Athens out of the euro. "It's all going to be about what happens on June 17," the trader said.

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