* German Bunds hit as Fed, stress tests fuel equities rally * German 10-year yields could rise to 2 pct in coming days * Italian yields stable before 6 bln eur of supply LONDON, March 14 (Reuters) - German Bund futures hit their lowest level in two weeks on Wednesday after the U.S. Federal Reserve sounded a less downbeat note on growth and most U.S. banks passed their annual stress tests, denting demand for safe-haven government bonds. Bunds extended the previous day's losses after the Fed said after a policy meeting that it expected "moderate" growth over coming quarters along with a gradual decline in the unemployment rate. German 10-year yields could test in coming days the 2 percent level that has formed the upper end of their trading range so far this year, as improved prospects for the global economy fuel a rally in riskier assets. "They (the Fed) were modestly upbeat on the economy ...Banks passing the stress tests generally is helping risk-on and gave the next push down in Bunds," a trader said. The Fed said most of the largest U.S. banks passed their annual stress test, in a report that underscored the recovery of the financial sector. The June Bund future fell more than a full point to 137.18, its lowest since Feb. 27 while the German 10-year yield was up nine basis points at 1.91 percent. Selling in the contract accelerated after stop levels were triggered around 137.40, according to traders. Bunds looked vulnerable to further losses with European equities hitting new 2012 highs and the risk of an imminent unruly Greek default averted after the country's successful debt restructure, Commerzbank strategists said, prompting them to maintain tactical short positions on the Bund. "This combination of risk appetite coming back on less uncertainty with regards to the Greek rescue package and slightly more positive macro tone are giving additional headwind to Bunds," said Rainer Guntermann, a strategist at Commerzbank. "We could well imagine that the trading range could test the upper side at 2 percent or slightly above on 10-year Bund yields." Peripheral euro zone government bonds held largely steady as traders braced for up to 6 billion euros of supply from Italy which aims to sell a new three-year BTP bond as well as a 2019 bond. The auctions are expected to meet with solid demand from investors flush with cheap European Central Bank funds and drive three-year borrowing costs below 3 percent, half what Italy had to pay a few months ago. Credit Agricole strategists said they saw good value in the new Italian three-year issue, and recommend switching out of Spain's Jan. 2015 bond which has not been tapped since last August. "There is a 25 bps pick-up from the Spanish to the Italian issue, making this possibly the best value Spain-Italy switch at this time. At anything above 10bps, the switch makes sense and should be held medium term," they said in a note. The three-year BTP yielded 2.887 percent in the grey market while the Spanish Jan, 2015 yielded 2.7 percent. Italian 10-year yields were unchanged on the day at 4.898 percent with the Spanish equivalent up two bps at 5.18 percent.