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Bunds brave inflation data, investors stick to rate bets

* German, Spanish inflation picks up in November

* Investors stick to expectations of further ECB easing

* Italian 10-year yields fall to 7-month low at auction (Updates to close)

By Ana Nicolaci da Costa

LONDON, Nov 28 (Reuters) - German bonds braved data showing a rise in inflation in certain euro zone countries on Thursday, with investors reluctant to sell them on expectations the European Central Bank would stick to a loose rates policy.

German consumer prices harmonised with other European Union countries rose by 1.6 percent year-on-year in November, while the Spanish equivalent increased by 0.3 percent.

This fueled expectations euro zone inflation will exceed the 0.8 percent forecast when it is released on Friday, but the meager prints kept investor hopes for further monetary easing alive.

"The market is still on the tune that the ECB has acted with an unprecedented sense of urgency on the back of a very low inflation trend and that the trend now, in terms of expectations, is towards lower inflation," Alessandro Tentori, global head of rates strategy at Citi said.

German Bund futures saw a settlement close of 141.65, up 2 ticks on the day, having fallen to a low of 141.14 earlier as caution set in before the German inflation data. It is poised for weekly gains.

Volumes were low due to the U.S. Thanksgiving holiday.

Yields on other higher-rated bonds were also flat.

An unexpected drop in annual euro zone inflation in October to 0.7 percent - well below the ECB's close-to-2 percent target - prompted the central bank to cut its key refinancing rate to a record low of 0.25 percent earlier this month.

Since then, comments from ECB officials have on the whole underpinned the view that it will further ease monetary policy.

"I don't think they will deviate from their dovish tone. At the end of the day, inflation is still half of what it should be," one trader said.

Citi's Tentori said the market is probably now expecting euro zone inflation of around 1 percent, but there is a risk that the number comes below that, fuelling German bond gains.

He said data showing euro zone money supply growth slowed in October did not support a trend towards higher inflation.

"We are definitely expecting much more action from the ECB," said Jussi Hiljanen, chief fixed income strategist at SEB in Stockholm. He expects the ECB to begin an asset-purchase programme next year.

ITALIAN AUCTION

Italian 10-year yields were down 1.5 basis points at 4.05 percent, outperforming the rest of the market.

At its last 10-year debt auction this year, Italy's borrowing costs fell to a seven-month low. Demand was 1.5 times the 2.5 billion euros sold, in line with a previous auction.

Some investors may have been encouraged by the expulsion of former premier Silvio Berlusconi from the Italian parliament over a tax fraud conviction, analysts said. Berlusconi's departure could help to stabilise Prime Minister Enrico Letta's government, they said.

Letta won a confidence vote late on Tuesday with the help of a splinter group from Berlusconi's party.

"More stability for the government seems to be the most likely scenario near term. With Berlusconi out of the Senate and his close allies (in) the opposition, snap elections are less likely at the current juncture," said Annalisa Piazza, market economist at Newedge in London. (Editing by Janet Lawrence, Larry King, Ron Askew)