* European shares, euro inch higher in cautious trade
* EU summit due, Spanish bond auction digested
* Treasuries win some reprieve from recent sell-off
By Neal Armstrong
LONDON, Dec 16 (Reuters) - European markets were little changed in thin trade on Thursday as investors digested a key Spanish debt auction ahead of a summit at which they hope EU leaders will agree fresh steps to tackle the region's debt crisis.
U.S. Treasuries won some reprieve from a sell-off near key support levels.
EU leaders meet in Brussels on Thursday and Friday for their end-of-year summit, with efforts to overcome the year-long debt crisis at the heart of their agenda.
Leaders will try to agree how to stop it spreading, with Portugal and Spain in their sights, and discuss changing the EU's treaty to create a permanent crisis-resolution mechanism from 2013 and might look at enlarging the existing crisis fund. .
Markets are not anticipating any significant developments from the summit, though any positive news would likely support the euro and risk appetite.
"Spain is going to be the issue, with the threat of a downgrade, investors will be looking for comments from the EU meeting," Will Hedden, a sales trader at IG Index, said.
"We don't want Spain to get bailed out. If it does, it sends a big message to investors that if an economy as big as Spain is fragile, then the euro-zone may be a risky place to do business."
Spain's Treasury paid 5.5 to 6 percent on Thursday to sell more than 2 billion euros of 10- and 15-year bonds, with yields rising sharply from the previous corresponding sales a day after ratings agency Moody's put the country's sovereign debt on review for a possible downgrade. European stocks traded with gains of around 0.2 percent at 1,129.45. The euro was up 0.2 percent against the dollar at $1.3240 after coming under pressure on Tuesday on Moody's Spain warning.
Oil was trading a touch lower at $88.48, while gold rose 0.3 percent.
Ten-year U.S. Treasury futures expiring in March were up 19/64 after plumbing a 7-month low overnight. In the cash market, the yield on the 10-year note slid to 3.47 percent after climbing as high as 3.57 percent overnight. The 10-year yield has risen nearly 90 basis points since November, contributing to a dramatic steepening of the 2-year to 10-year yield curve to 282 basis points from 226 basis points at the beginning of November.
That spread is on course for the largest widening in a quarter since the first quarter of 2008.
"The market is very difficult now ... but what I do sense is that we've got down to levels that are technically supportive," said a trader at a European firm.
"It's difficult to sell at this low and initiate a new position," he added.
JAPAN OUTPERFORMS, CHINA SLIPS
Japanese stocks continued to outperform global stock markets thanks to foreign investment. Japan's Nikkei share average was flat, though up 1 percent so far in the week, outperforming the MSCI all-country world index advance of 0.1 percent.
"The Nikkei is taking a breather after a six-week rally, but sentiment remains bullish overall," said Takashi Ohba, a senior strategist at Okasan Securities in Tokyo. Foreign investors have been net buyers of Japanese stocks for six consecutive weeks to Dec. 11, purchasing a cumulative $9.8 billion worth of equities, Japan's finance ministry data showed.
The MSCI Asia Pacific ex-Japan index of equities fell 0.5 percent in sluggish trade, lead by a fall in Chinese stocks.
After sliding more than 2 percent in November on early profit taking, the index has staged a rally in light turnover in December. It is up 3.6 percent so far in December.
(Additional reporting by Joanne Frearson, Hideyuki Sano and Kevin Plumberg, editing by John Stonestreet)