The 4.04 billion euro bond sale drew less demand than expected, falling short of previous auctions and narrowly avoiding becoming the first German auction in five months to see bids fall short of the total amount issued.

Bund futures fell 59 ticks to 142.23 after the auction, their lowest in nearly a week, before settling at 142.42. German 10-year yields rose 4 basis points to 1.66 percent.

Market participants attributed the weak demand to a reluctance to take big positions before Italian elections this weekend, as well as to the need for clearer signals from economic data before judging progress across the currency bloc.

"This is a weak result with the auction only just being covered on a real basis," Rabobank rate strategist Lyn Graham-Taylor said, although he highlighted the bond sale came at a competitive price compared to secondary market levels.

"This (weakness) may be explained by the general risk-on tone of recent times and also that many investors are looking to sit on the fence heading into the Italian elections."

Tuesday's upbeat investor sentiment data from Germany was also cited as a factor behind the sluggish demand, and further encouragement from purchasing managers' index number on Thursday and a German survey on Friday could extend the fall in Bunds.

Nevertheless, worries that the Feb. 24-25 Italian election will produce a fragmented coalition government with limited scope to reform were likely to keep Bund futures in the 141.80-143 range that has held over the last two weeks, analysts said.

"We can retest this 141.80/90 level on the Bund if we have strong data but it could prove to be strong support as long as there's (uncertainty over) Italian elections and it could be a potential to enter into German bonds," said Eric Oynoyan, a strategist at BNP Paribas.

Despite Italy's looming election, the country's 10-year bond yields were a modest 2 basis points up on the day at 4.42 percent, remaining in the middle of the 4.13-4.64 percent range that has prevailed since January.

Traders said there were some buyers willing to take advantage of price dips and this has stabilised the market this week.

DZ Bank said shorter-dated Italian bonds looked attractive as overall market sentiment improved and in anticipation of a fresh rally if former Prime Minister Silvio Berlusconi's election campaign fails to win him influence.