* Bunds sell-off, rally in Italian, Spanish bonds slows * Soothing words from policymakers to help Italian debt sale * Markets want action to follow words before rallying more By Marius Zaharia LONDON, July 30 (Reuters) - Italian and Spanish bond yields inched lower on Monday as euro zone policymakers appeared to be preparing for bolder measures to tackle the debt crisis, but the room for further falls depended on how soon any action was taken. European Central Bank President Mario Draghi said last week the central bank would do whatever it takes to preserve the euro, a message echoed by German Chancellor Angela Merkel and French President Francois Hollande. The soothing words from policymakers were likely to improve demand at an Italian action later in the day. Some in markets expect the ECB to resume its bond-buying programme (SMP)-- opposed by Germany's Bundesbank -- in the near term and possibly to ease monetary policy further at its Thursday meeting. Some also expect policymakers to show more openness towards the idea of giving the euro zone rescue funds a banking licence. That would allow the funds to have a more active role in lowering Spanish and Italian borrowing costs. However, the nature and timing of any action is unclear and euro zone officials have said September is shaping up to be a "make-or-break" month in the search for a resolution to the three-year-old debt crisis "It seems that policymakers are taking things more seriously," Commerzbank rate strategist Rainer Guntermann said. "Expectations are high ... but for the rally to continue we may need more colour, more details and maybe some action." Spanish 10-year government bond yields were 14 basis points lower at 6.63 percent, having fallen from levels around 7.5 percent seen before Draghi's comments on Thursday. Italian 10-year yields fell 7 bps to 5.88 percent. Officials have also said the ECB and national central banks are considering taking significant losses on their Greek bond holdings, in another sign that measures previously considered taboo are being contemplated behind the scenes. The improvement in sentiment may prove temporary, as the markets' main concern, that Spanish may need a sovereign rescue, is still unaddressed. A euro zone official said Economy Minister Luis de Guindos had brought up the prospect of a 300 billion euro bailout last week at a meeting with German Finance Minister Wolfgang Schaeuble. Spain denied this was the case. A Spanish bailout would use up euro zone's resources for fighting the debt crisis and leave Italy, seen as the next potential domino after Spain, unprotected. ECB bond purchases are likely to be of little use in such a situation. "It's just time-buying," Lloyds rate strategist Eric Wand said. "They (the ECB) may take us through to September ... but the ECB action really needs to be supported by some other stabilisation measures at EU level." In the meantime, however, Wand said the market was building expectations of some form of ECB intervention: "The nature of Draghi's language was quite forceful so I would expect them to act. The reaction could be quite ugly if they didn't." German Bund futures were 34 ticks higher at 143.55, in a sign that cautiousness is replacing the enthusiasm seen last week as markets wanted words to be followed by action. The comments from euro zone policymakers do, however, provide a more favorable backdrop for Italy's sale of up to 5.5 billion euros in three-to-10-year bonds. "The odds for bumpy auctions this week have receded," said Commerzbank's Guntermann, adding that a Spanish auction on Thursday - just before the ECB will release the outcome of its meeting - should also see improved demand. Belgium also plans to sell between 2.0 billion and 3.5 billion euros of five-, 10- and 15-year benchmark bonds.

Source