* Spain uncertainty keeps sentiment fragile * Bunds take a breather after Wednesday's solid gains * Italy debt auction seen finding sufficient demand By Marius Zaharia LONDON, Sept 27 (Reuters) - Spanish government bond yields were stable on Thursday as uncertainty over whether the troubled country would ask for a bailout kept investors edgy ahead of the unveiling of its 2013 budget. The fragile market mood in the euro zone puts an Italian debt auction under closer scrutiny, but the country is still expected to sell close to the upper end of its 5.5-7 billion euro target range and see falling borrowing costs. Spain is expected to announce a tight 2013 draft budget along with a series of economic reforms, aiming to avoid the political humiliation of having Brussels impose conditions on a request for an international bailout. Prime Minister Mariano Rajoy is inching closer to asking the EU and European Central Bank for more support but he has been resisting pressure to do so swiftly. "Nothing that I read on Spain says to me that they're going to do the budget and then they're going to apply for aid straight away," one trader said. "And whatever numbers they put up I would be sceptical about them. The whole of Europe seems to think that we're going to return to growth next year, which I think is questionable." Rajoy's hesitation to make a move that has seen other European Prime Ministers losing their jobs coincides with violent anti-austerity protests bursting in Madrid and a rise in Catalonian nationalism that could even question Spain's existence in its current form. Spanish 10-year bond yields were flat at 6.08 percent, but analysts said they expected them to resume rising as markets increase pressure on Rajoy to ask for help. Pressure may also come from a Moody's Investors Service rating review, which is expected by the end of the month and could see Spain losing its investment grade status. "Spanish bond yields would probably trend higher. Friday looks like a soft spot for rating announcements," Commerzbank rate strategist Rainer Guntermann said. SENSITIVE TO SPAIN German Bund futures were 10 ticks lower at 141.53, taking a breather after rising almost one-and-a-half points on Wednesday. Uncertainty in Spain has pushed the contract higher in recent sessions, after it hit a 5-1/2 month low of 138.41 on Sept. 17. Commerzbank's Guntermann recommended investors a "tactical short" position for Thursday, only because the previous session's rise was too sharp. He said he targeted 141.00 in the Bund future, which would be consistent with a 1.5 percent level in 10-year cash yields. "But the risks in the periphery are still valid, so this would only be a temporary correction," Guntermann said. Italy will offer five- and 10-year debt later in the day. Borrowing costs are expected to fall from previous sales, but demand, although likely to be sufficient, may be lower. At a previous sale on Aug. 30, investors bid 1.42 times the amount of offer for 10-year bonds. For five-year bonds, the bid/cover ratio was 1.46. "The sector that Italy is trying to (tap) is quite sensitive to news in Spain," said Chiara Manenti, fixed income strategist at Intesa SanPaolo.

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