EURO GOVT-Italian bonds stable before debt auction
* Italy plans to sell 5-7 billion euros of bonds
* Berlusconi brings Italian politics back in focus
* Bund futures hit 142.00, then retreat
LONDON, Oct 30 (Reuters) - Italian government bonds held steady on Tuesday before a debt auction that will test how worried markets are about intensifying political jitters in Rome.
Data showing the Spanish economy contracted slightly less than expected in the third quarter and renewed interest in selling safe-haven German Bunds at technically important levels helped stabilise peripheral debt markets after a sell-off on Monday.
Former Italian Prime Minister Silvio Berlusconi threatened at the weekend to withdraw support for Mario Monti's technocrat government before elections in April. That swung investors' attention back to Italy as uncertainty over the timing of a Spanish aid request lingered.
A sale of 5-7 billion euros of new 2017 bonds and re-opened 2022 bonds may see weaker demand due to the perceived rise in political risk, especially as longer-dated debt is more sensitive to swings in demand from foreign investors.
However, the recent rise in yields may draw sufficient bids for the sale to go relatively smoothly.
``Italian auctions usually go through quite well. Maybe after the recent news they will come weaker than expected, but it won't be a disaster,'' said Norbert Wuthe, rate strategist at Bayerische Landesbank.
``But with elections coming closer it will be more obvious that reforms have not been implemented ... and the real problem in Italy is politics. The periphery will suffer again.''
Italian 10-year yields were 3 basis points lower on the day at 4.98 percent, having risen about 25 basis points in the last two weeks.
The last Italian five-year bond auction saw demand worth 1.38 times the amount offered to investors, below a 1.49 average for 2012. The bid/cover ratio for a 10-year debt sale in September was 1.33, compared with a 1.59 average.
Credit Agricole rate strategist Orlando Green said in a note the worst case scenario was that the Treasury issued the minimum target, although it was ``more than likely'' it would sell more.
Wuthe added that if political tensions in Italy intensified, increasing pressure on the euro zone periphery in general, Spain may have to ask for a bailout after regional elections in Catalonia in late November.
Spain remains reluctant to make the move, which is eagerly-awaited by markets as it will enable the European Central Bank's bond-buying programme, seen as a capping peripheral yields.
Ten-year Spanish yields were 2.4 bps lower at 5.644 percent. Spain's economy shrank 0.3 percent in July-September from a quarter earlier, less than the consensus for a 0.4 percent contraction.
German Bund futures were 7 ticks lower on the day at 141.63, having earlier risen as high as 142.00, a level at which traders noted renewed selling interest. Ten-year cash yields also bounced off a low of 1.45 percent, which was the 100-day moving average.
The selling pressure on Bunds ``was purely technical,'' one trader said.
Trading was expected to be thin, with U.S. bond markets closed on Tuesday due to the massive storm Sandy battering the U.S. east coast.