* ECB signals in no hurry to cut rates, Bunds fall
* Strong demand for Spanish debt boosts peripherals
* Spanish issuance skewed towards 10-year sector
By Emelia Sithole-Matarise and Ana Nicolaci da Costa
LONDON, March 7 (Reuters) - German Bunds slumped on Thursday after the European Central Bank gave no hints on further interest rate cuts and as a strong Spanish bond sale lifted demand for higher-yielding euro zone debt.
Some market participants had expected the ECB to signal fresh monetary easing given worsening economic data and Italy's political instability after last week's inconclusive elections, but ECB President Mario Draghi gave no indication such a move was on the cards. The bank kept interest rates unchanged at 0.75 percent.
June German Bund futures fell 48 ticks on the day to 142.77 while German two-year yields, which are most sensitive to shifts in interest rate expectations, almost doubled to 9 basis points.
"The market had been looking for strong hints that we were going to get a rate cut next month but they got something very vague. It wasn't sufficient to hold the market up and we are seeing a little bit of capitulation," said David Keeble, global head of fixed income strategy at Credit Agricole.
U.S. data showing a fall in the number of weekly jobless claims also prompted investors to cut their exposure to low-risk debt, with the negative tone in Bunds and Treasuries seen extending into Friday before the key nonfarm payrolls report.
German 10-year yields were last up 4 bps on the day at 1.49 percent, with the euro zone's benchmark issuer underperforming Spanish and Italian bonds as a strong Spanish bond auction perked up demand for the region's riskier debt.
Spain sold 5 billion euros of three bonds at auction on Thursday - at the top of end of the target range - attracting higher bids across maturities as investors continued to rely on the ECB's promise to buy bonds of countries that ask for aid.
The sale was skewed towards 10-year debt, a sign investors are confident enough to load up on longer-dated Spanish paper even though it falls outside the scope of possible ECB support, and while Italy struggles with political uncertainty.
"It's confirmation that Spanish bonds are reacting quite well, especially in the aftermath of the Italian elections," said Alessandro Giansanti, strategist at ING.
Spanish 10-year government bond yields fell 12 basis points to 4.91 percent. Average borrowing costs at the auction fell and the bid-to-cover ratios rose across the board, more than doubling in the case of the 2015 bond to 4.9 from 2.0 at a similar sale in January.
The successful result came as political stalemate in indebted southern European peer Italy after an inconclusive election raises fears of further instability in the euro zone.
Ten-year Italian yields were 3.9 bps lower at 4.63 percent, as its bond prices rose for a third consecutive day. But they remained well off two-year lows of 4.075 percent hit in late January - a sign of lingering political worries.
Sanjay Joshi, head of fixed income at London Capital Asset Management, which manages $1.5 billion in fixed income assets, said the fund had dipped back into Italian debt markets after a sharp post-election sell-off made them cheaper and attractive.
But over a six-month horizon it is still underweight peripheral sovereigns, citing the fluid political situation in Italy.
"Clearly the OMT (Outright Monetary Transaction, the ECB's bond-buying programme) threat remains in the background. That might continue to protect Italy and Spain but the volatility is extreme," Joshi said.
"From a strategic perspective on peripheral sovereigns, we are still remaining underweight i.e. zero exposure."
Credit Agricole's Keeble also said wariness about the investor situation in Italy would curb any deep selloff in German Bunds, the euro zone's safe haven of choice.
"We've still got issues with Italy, they still haven't got a government so I can't imagine that people are going to go super short Bunds on the basis of the European story yet," he said.