* Spanish and Italian bonds under pressure after recent gains * German Bunds poised for third week of losses * EU summit expected to disappoint; Bunds could rebound By Ana Nicolaci da Costa LONDON, June 22 (Reuters) - Italian government bond yields rose sharply on Friday, along with the cost of insuring against a debt default, as the market prepared for a busy week of issuance. Spanish and Italian bonds also came under pressure as sentiment towards riskier assets waned on recent poor economic data and a series of bank downgrades. Italy is due to sell zero-coupon and inflation-linked bonds on Tuesday and BTPs on Thursday. The Treasury will announce details of the first sale later on Friday and of the BTP auction on Monday. The Treasury may have to pay more to get the bonds away amid widespread concerns about contagion from Spain even though domestic investors are likely to support the sale. "Usually you see some price concession going into the auction, that's the pattern we are seeing today," Rainer Gunterman, strategist at Commerzbank said. "The (auction result) will depend on the risk appetite (that day)." Italian 10-year government bond yields were 7.7 basis points higher on the day at 5.83 percent. Five-year credit default swaps were 10 basis points higher at 518 basis points, according to market monitor Markit. The price means it costs $518,000 dollars to insure $10 million of debt against default. Spanish 10-year government bond yields were also up 3.8 bps at 6.66 percent after falling around 57 bps this week, partly on hopes of some policy response at an European Union summit next week. Ahead of that, leaders of Germany, France, Italy and Spain met on Friday in Rome to try to find common ground. "Yesterday and the day before there was probably a little bit of short covering, just thinking that things have gotten so bad that we might be close to some kind of resolution or at least some kind of intervention," Gary Jenkins, director of Swordfish Research said. "Then today maybe that trade has taken place ... and today you have got a situation where there are just less buyers for that kind of product." Italian and Spanish government bonds also fell as appetite for riskier assets deteriorated after data showed weakness in major world economies. German business sentiment fell for a second straight month in June to its lowest level in over two years.. Surveys on Thursday showed business activity across the euro zone shrank for a fifth straight month in June and Chinese manufacturing contracted, while weaker overseas demand slowed U.S. factory growth. Meanwhile, ratings agency Moody's downgraded 15 of the world's biggest banks on Thursday. BUND CORRECTION EXPECTED German Bunds were poised for a third straight week of losses, with the most recent losses also fueled by hopes of some sort of policy response at next week's EU summit. German Bund future was down 8 basis points at 141.44 in a choppy trading session that took the contract in and out of positive territory. But analysts said the Bund was overdue a correction higher. "Given where expectations are (for the EU summit) ... there is increasing scope for disappointment," Gunterman said. "It's still difficult to see that there will be common ground for the big master plan the market is looking for." Gunterman said there was key resistance at 141.58 and a sustained break above that could see further upside for the Bunds. Ten-year German government bond yields were up slightly at 1.54 percent, having risen above 1.60 percent earlier in the week. "From a fundamental point of view we think that at 1.60 (percent), (10-year) yields have adjusted quite a bit already... we think we are at the upper end of the range and Bunds are set for a correction as we don't see a quick fix to the crisis," Gunterman added. Independent auditors said on Thursday Spanish banks may need up to 62 billion euros in extra capital, to be filled mostly by a euro zone bailout. That was less than the maximum 100 billion euros offered by euro zone officials but the trader said the number was unrealistic. "I am a little bit skeptical of the numbers, I don't think they are big enough," the trader said. Many in the markets see the bank rescue as a mere prelude to a full bailout for the Spanish state, which Madrid denies it will need.

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