(Reuters) - Bond investors ditched Italian and Spanish bonds and bought up German Bunds in search of low-risk assets on Monday as confidence crumbled that last week's steps towards closer euro zone fiscal integration would halt the debt crisis.

Markets grew increasingly sceptical that an agreement on stricter budget rules and a stronger fiscal union was enough to bring the region's debt crisis under control -- unless it spurred the European Central Bank to ramp up the scale of its bond-buying intervention.

We have a nice agreement: a fiscal compact, commitments to keep fiscal deficits down. But, actually, does any of this solve the euro crisis? No it doesn't, said Victoria Cadman, economist at Investec in London.

We still sit here searching for the big bazooka solution.

Although the ECB was seen intervening in Italian debt markets throughout the day, it has not indicated it is prepared to increase the scale of its bond purchase programme. Data showed that the central bank slashed the amount it spent buying bonds in the run up to last week's summit.

Markets were also on alert for news from ratings agency Standard & Poor's, which on the eve of Friday's EU summit warned it might downgrade most euro zone countries if they did not come up with a decisive set of anti-crisis measures.

It seems like the market is expecting some kind of move (from S&P) and that has heavily influenced the sovereign risk market today, said Morten Hassing Povlsen, strategist at Nordea in Copenhagen.

The momentum seems to be downward for core yields and we will likely see continued risk-off until we get clarification.

Underscoring the souring sentiment towards the euro zone's lower-rated issuers, yields on five-year Italian bonds briefly rose above 7 percent. An auction of the same bonds on Wednesday was likely to keep Italian debt under pressure in the coming days, analysts said.

The Italian 10-year yields briefly threatened the 7 percent danger level, peaking at more than 6.8 percent before ECB intervention helped yields back to 6.6 percent -- still 20 bps higher on the day. Spanish 10-year yields briefly rose back above 6 percent and the cost of insuring most euro zone debt against default rose.

Bund futures settled 117 ticks higher at 136.54, unwinding almost all of a sharp fall seen on Friday, while German 10-year yields fell 10.5 basis points to 1.996 percent.

If Italy continued to face unsustainably high costs to refinance its debt the consequences would be felt across the euro zone due to the size of the Italian economy and banks' wide exposure to the country's debt.

Nothing has been done to allay the growing concerns about Italy's huge funding needs next year, said Nicolas Spiro, managing director at Spiro Strategy.

Highlighting the market nervousness, the Netherlands sold T-bills at negative yields as investors paid up to preserve cash in top-quality paper and avoid bank deposits.

Italy, by contrast had to pay a yield of just under 6 percent to sell 7 billion euros worth of one-year T-bills. The sale drew decent demand from retail clients enticed by the country organising a BOT day in which it scrapped fees for the bills at auction.

RATINGS

With no sign of a decisive solution to address both short- and long-term concerns over the sustainability of euro zone debt, things were likely to get a lot worse before they get better, analysts said.

A Standard & Poor's analyst said the summit deal was a significant step in resolving a crisis of confidence, but added that the EU will need more summits to resolve its debt problems and time was running out.

Traders said they were still waiting for an official announcement from the S&P on how the credit watch negative warning will be resolved.

Another ratings firm, Moody's Investors Service, said the summit measures were not decisive, leaving the cohesion of the bloc under continued threat. It said it would revisit the ratings of euro countries in the first quarter of 2012.