* Spain rallies, 10-year yields hit four month low sub-6 pct
* Mood positive on peripheral debt despite hurdles ahead
* Safe-haven bids for Bunds diminished, eyes on U.S. data
By William James
LONDON, Sept 7 (Reuters) - Spanish 10-year bond yields fell below 6 percent for the first time since May on Friday as the rally inspired by an ECB plan to buy government bonds further lifted riskier euro zone debt.
European Central Bank President Mario Draghi said on Thursday the bank would commit to potentially unlimited buying of bonds with maturities up to three years, albeit with tight conditions, in a landmark step toward addressing the crisis threatening Spain's ability to fund itself.
Spanish 10-year yields fell the furthest on Friday, down 31 basis points at 5.77 percent from more than 7.5 percent in July, while yields on two-year bonds, which are within the scope of the ECB plan, fell 15 bps to 2.91 percent.
"It's driving confidence through the market. You see the rally extending to longer maturities whereas in previous times the rally was concentrated on the short end," said Alessandro Giansanti, strategist at ING in Amsterdam.
Previous attempts to solve the crisis by buying bonds or pumping banks full of cheap cash had limited impact on longer-dated debt as investors remained sceptical, but the scale of the ECB's commitment has fuelled greater optimism.
Italian, Portuguese and Irish bond yields also fell, and the greater appetite for risk saw French and Belgian debt outperform German Bunds -- the region's lowest-yielding, least-risky assets.
Nevertheless, whether those gains can be sustained in the medium term will be the measure of the plan's success.
The ECB tied strict terms to any future purchases, meaning Spain would have to agree to conditions in a programme with the European rescue fund before bond buying started.
Spain's Prime Minister Mariano Rajoy appeared in no rush to seek a bailout on Thursday, potentially leaving markets in a period of limbo which could affect the positive sentiment.
"There's a lot in the price and Spain and Italy show no signs of asking for help - so how does that work?" a trader said.
SHOW THE MONEY
Although the verbal commitment to bond buying was welcomed, the dire economic situation in Spain and fellow bailout candidate Italy meant that to keep yields low, the central bank would have to follow through on its word by purchasing debt.
"(In Spain) on the budget side and the macro side we will not have very positive data in the coming months, so I really see that to have a continuation in this move we will need to see a programme activated," ING's Giansanti said.
The Bund future was 27 ticks lower on the day at 139.90, having fallen by more than a point on Thursday as the ECB plans cooled demand for safe-haven assets, and after better-than-expected U.S. data.
Alongside the performance of peripheral euro zone debt, the direction of markets will be determined by U.S. payrolls data which will be watched for clues to whether the U.S. Federal Reserve is preparing to launch fresh stimulus measures.
"We've got non-farms coming up where people are expecting a firm number. This sell-off doesn't look like abating any time soon, and it's tricky to stand in the way of it," a second trader said.
The non-farm payrolls report due at 1230 GMT was forecast to show the addition of 125,000 jobs in August.
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