* Spanish 10-year yields break above 7 percent
* Two-year Bund yields turn negative after ECB rate cut
* Bund futures have their best week since December 2011
By Ana Nicolaci da Costa
LONDON, July 6 (Reuters) - Yields on Spain's 10-year debt rose back above the 7 percent danger level on Friday as the impact from a European Union summit last week faded and an interest rate cut in the euro zone did little to restore investor appetite for riskier assets.
The European Central Bank's rate cut to 0.75 percent put pressure on two-year German bond yields, taking them to negative territory for the first time on record. That prompted investors to seek returns up the German yield curve and in other relatively safe euro zone debt markets, like France.
"The ECB said nothing to help the periphery. The ECB rate cut is not going to help periphery with yields at (current levels)," one trader said.
"The summit seems to be getting picked apart and markets are reacting accordingly. In a slowing growth environment, there is no way these countries are going to be able to meet any formal target anyway. The economy is not doing them any favors whatsoever." Ten-year Spanish government bond yields rose 19 basis points to 6.97 percent, having broken above the 7 percent level earlier in the day.
When yields on Irish, Portuguese and Greek debt surpassed 7 percent, they quickly spiked, making borrowing costs prohibitive and forcing those countries to seek international help.
Spanish yields were back to levels hit on July 28th, one day before European leaders decided that euro zone rescue funds could be used to buy peripheral debt in secondary markets and support banks directly.
But investors still doubt the fund has enough capacity to perform those tasks efficiently, while Finland has opposed its use for bond purchases.
Some had hoped the ESM bailout fund would eventually be allowed to borrow money directly from the central bank, but ECB President Mario Draghi dismissed that idea in a news conference following Thursday's rate decision.
"There was a perception in the market that the ECB would provide at least a hint ... that the ECB was ready to support at least in some form (peripheral bond markets)," UBS rate strategist Gianluca Ziglio said.
"The EU has lost a very, very big opportunity and it seems it is being punished by the market ... Things are going to get worse for the periphery."
GLOOMY U.S. PICTURE
U.S. data did little to cheer gloomy financial markets, showing that U.S. employers added fewer jobs in June than markets had expected.
The report fueled concerns that Europe's debt crisis is shifting the U.S. economy into low gear, raising the pressure on the Federal Reserve to do more to boost growth.
German Bunds saw their biggest weekly rise since December 2011, rising 2.1 percent, after three consecutive weeks of losses.
Bund futures jumped 82 ticks to a settlement close of 143.94 pushing 10-year yields 6 bps lower to 1.33 percent.
Two-year German yields were down 3.1 bps at -0.009 percent, prompting investors to seek higher returns up the German yield curve, with thirty-year bonds outperforming.
Five-year yields fell 6.1 bps to 0.34 percent and thirty-year yields dropped 7.7 bps to 2.18 percent.
Investors also sought value in other relatively safe markets, with debt from France, Belgium, the Netherlands and Austria all benefiting.
"German yields are so low now, accounts are looking for yields. France is the most liquid and the biggest market so that's why Asian (real money) accounts are buying," a second trader said. "This morning we saw Asian accounts buying five-year France and 10-year France in large size."
French five-year government bond yields fell 16.5 bps to 1.04 percent, while 10-year yields eased 12 bps to 2.38 percent.
Five- and 10- year Belgian, Dutch and Austrian yields were all down sharply.