* Spanish yields rise on bout of downbeat newsflow
* Protests, early Catalonia vote, Rajoy comments weigh
* Backdrop favors Bunds, will help German auction
* Germany sells up to 5 bln euros of 10-year paper
By Ana Nicolaci da Costa
LONDON, Sept 26 (Reuters) - Spanish yields edged closer to 6 percent on Wednesday after developments in Spain dampened expectations that Madrid will be able to ask for a bailout soon and secure central bank support for its debt.
Protests in Madrid on Tuesday, days before the 2013 budget is due to be announced, together with economically important Catalonia's decision to hold early elections and comments by Prime Minister Mariano Rajoy combined to hurt sentiment towards debt issued by lower-rated sovereigns.
The request for aid is a prerequisite for the European Central Bank to activate its bond-buying programme and the Spanish government's reluctance has kept borrowing costs range-bound, with traders reluctant to take yields too high on the possibility of intervention.
The sell-off in Spanish, and Italian, bonds coincided with a broader deterioration of sentiment towards riskier assets, making for a favorable backdrop to an auction of 10-year, safe-haven German paper.
"Overnight there has been a barrage of negative (news) regarding Spain in particular: the Catalonian elections and violent protests," Artis Frankovics, strategist at Nomura, said.
"This (backdrop) is positive for the auction itself, so it should be reasonably well-bid."
Germany will sell up to 5 billion euros of a bond maturing in 2022. At an auction in August, Germany saw the strongest demand at a sale of 10-year debt this year.
Ten-year Spanish government bond yields jumped 22 basis points to 5.99 percent and borrowing costs over two years firmed 22 bps to 3.45 percent.
Italian funding costs over 10 years edged 13 basis points higher to 5.23 percent and two-year yields rose 16 bps to 2.72 percent.
The deterioration in risk sentiment saw the German Bund future rally 87 ticks to 140.92 as the S&P 500 on Tuesday suffered its worst day since June and as Japan's Nikkei share average shed 2 percent on Wednesday.
"We would argue Bunds should remain supported in the short-term and buying on dips will continue," Rainer Guntermann, strategist at Commerzbank, said.
The contract tested technical resistance at around 141 - a level which it flirted with but failed to break in the previous session and on Sept. 11, Guntermann said.
Spain's Prime Minister Mariano Rajoy said on Wednesday he was ready to seek a new rescue package for his troubled country but only if its debt financing costs remain too high for too long.
The comments, along with Catalonia's announcement and the protests, helped drive the cost of insuring Spanish debt against default 18 basis points higher to 387 bps.
European Central Bank President Mario Draghi has made clear that any request for help to the euro zone rescue fund (ESM) - the prerequisite for central bank intervention - would be met with strict conditionality attached.
"The ESM conditionality will certainly apply on the regions as well and if you have demands for more fiscal autonomy, it will be more difficult to impose any new austerity measures from the top, so it raises the bar for Spain asking for a bailout," Frankovics added.
The debt issued by higher-rated sovereigns rose along with German Bunds, with the French 10-year yield down 3.7 basis points at 2.25 percent, the Dutch equivalent 6.5 bps lower at 1.80 percent and Austrian borrowing costs over 10 years 2.9 bps lower at 2.01 percent.
"Mounting periphery event-risks and uncertainties have generated a flight into the core belly of the curve, which we think will prove transient," Peter Chatwell, strategist at Credit Agricole, said in a research note.
He said the five-year sector in the French curve was overbought and therefore favored selling a 2017 bond to buy 2016 and 2019 bonds.