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German yields see biggest daily gain in a month on U.S. debt hopes

* German yields track U.S. equivalent higher

* Republicans to offer Obama short-term rise in debt limit

* Italian debt outperforms after solid debt sales

By Ana Nicolaci da Costa and Emelia Sithole-Matarise

LONDON, Oct 10 (Reuters) - German bond yields saw their biggest daily gain in a month on Thursday as signs Washington was moving towards breaking a stalemate over debt and averting a potential U.S. default hurt demand for safer assets.

German Bund futures tracked their Treasury counterparts lower as Republicans said they will offer President Barack Obama a short-term increase in the federal debt limit if he will agree to negotiate with Republicans on a broad range of fiscal issues, including funding to reopen the government. nL1N0I00XS

The backdrop helped fuel a rally in Italian bonds which outperformed most euro zone counterparts after solid debt sales this week and after a successful vote of confidence last week.

President Barack Obama will meet with Senate Republicans on Friday to discuss how to end the U.S. government shutdown and a looming deadline to raise the nation's debt limit, a Republican spokesman said.

"It is simply hope that we are going to get a (temporary) increase in the debt limit... the threat of default should disappear fairly quickly and the Bunds have been breaking down on that," David Keeble, global head of fixed income strategy at Credit Agricole said.

"Italy has gone through its political crisis and it's got a little bit of catch-up to do particularly to Spain," he said.

German Bund futures settled 59 ticks down at 139.65. Ten-year German government bond yields jumped 5.6 basis points to 1.87 percent - its biggest daily gain in a month.

Italian bonds outperformed most other euro zone debt, with yields falling 3.6 basis points to 4.33 percent - one day before an the country sells more bonds.


Rome followed up a robust syndicated sale of 5 billion euros of a new seven-year bond on Wednesday with an 8.5 billion euro auction of one-year Treasury bills. It drew healthy appetite, with yields falling to their lowest in four months.

Spain had a similar solid result with its sale on Wednesday of 31-year paper, its first ultra-long debt sale since 2009.

Italy will offer a further 6 billion euros of bonds on Friday, capitalising on a relief rally as concerns about political instability wane after the government won a confidence vote last week.

"Demand for the debt sales was pretty impressive. Distribution of syndicated deals looked pretty healthy," said Harvinder Sian, a rate strategist at RBS.

"The market has taken on the duration, the high 31-year issuance in the periphery space, got past that and is now rallying. It also does help that risk assets are rallying with the debt ceiling debate looking less tense in the U.S."

Italian yields fell back below Spain's, as Italian debt recouped some of the ground lost when a political crisis in Italy was weighing on appetite for its debt.

Ten-year Spanish government bond yields were 1.5 basis points higher at 4.35 percent.

After this week's solid debt sales, both countries will have met more than 80 percent of their borrowing needs for this year.

The feel-good factor spread to other periphery, with 10-year Greek yields falling to their lowest since early June.

Greece posted a central government surplus in the first nine months of the year excluding debt servicing costs, putting it on track to hit fiscal targets that open the way for debt relief from its international lenders.