Italian yields also fell before a sale of up to 6.25 billion euros of five and new 10-year bonds, with shorter-dated debt outperforming ahead of Wednesday's offer to banks of three-year European Central Bank cash.

The money is also expected to support Italian and Spanish government bonds. "We saw a very good technical breakout yesterday for Bunds but the ECB operation is in the price now, the 500 billion euros, so there is room for disappointment," a trader said.

The ECB's first long-term cash injection in late December helped stabilise markets by removing concerns about a liquidity crunch in Europe and banks, particularly in Spain and Italy, used some of the funds to buy their governments' debt.

First indications of the likely take-up will be seen in Tuesday's shorter-dated ECB financing operations. Banks may take less in one-week funds in favour of longer-term financing.

"A significant decline of weekly funds would feed into upbeat expectations for take up on Wednesday," said Rabobank rate strategist Richard McGuire.

Spanish and Italian banks' holdings of government bonds rose to almost 85 billion euros in December and January, according to ECB data, although some of that is accounted for by an increase in the value of the paper as peripheral markets rallied.

But analysts say banks may be building a risky position.

"As banks load up on their own sovereign's debt they become increasingly vulnerable to a change in sentiment...the question of asset quality and solvency still remains," McGuire said.

Although much of the so-called "carry trade" money is believed to have been funnelled into shorter-dated paper, the liquidity should support Thursday's Italian bond sale, with longer-dated borrowing costs expected to fall below 6 percent.

Italian redemption and coupon payments this week, which total around 40 billion euros, will also boost the sale.

March Bund futures were 10 ticks lower at 139.64 with a break above Monday's 139.95 high necessary to allow a test of January's 140.23 record high.

Ten-year yields were up a basis point at 1.84 percent, having headed back towards the 1.74 percent lower end of this year's trading range.

The German parliament endorsed a second bailout for Greece on Monday but a growing revolt against pouring in more money for the euro zone helped support Bunds.

"If Bunds do break out of their range, it's probably going to be to lower yields," the trader said.

"The ECB cash is going into all asset classes and there is still a lot of uncertainty in the euro zone."

Standard & Poor's on Monday cut Greece's long-term ratings to 'selective default', the second firm to downgrade the country , prompting the ECB to suspend Greek bonds' eligiblity as collateral in its financing operations.

Meanwhile derivatives body ISDA, the International Swaps and Derivatives Association, has been asked to determine if a Greek sovereign credit event has occurred. This may lead to a payout on outstanding credit default swap contracts.