* European shares, euro near flat in cautious trade
* EU summit begins, Spain pays premium at bond auction
* Euro zone peripheral bonds dip
* Treasuries win some reprieve from recent sell-off
By Neal Armstrong
LONDON, Dec 16 (Reuters) - European shares shed early gains and peripheral euro zone bonds dipped on Thursday after Spain paid a high premium at a debt auction, ahead of a summit at which EU leaders will focus on the region's debt crisis.
U.S. Treasury yields eased but held near seven-month highs after jumping the previous day on a rise in inflation expectations and the spectre of higher growth and a wider deficit.
EU leaders are meeting 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 was forced to pay a hefty premium at its final bond auction of the year on Thursday, in a key test of investor appetite for euro zone peripheral debt a day after Moody's said it may cut the country's rating.
The Spanish Treasury raised 2.4 billion euros ($3.20 billion), within the targeted range of 2-3 billion euros but disappointing some analyst who expected more debt to be sold.
"In the short term this should reduce pressure on the Spanish market, but I think when one looks at the bigger picture and considers the small amount sold, with low bid-covers, yet at a high yield, then it seems clear that peripheral markets remain under pressure and in need of support from policymakers," said Peter Chatwell, rate strategist at Credit Agricole in London.
Government debt yields for Spain as well as Portugal and Italy were pulled higher after the auction, while Bunds traded in a narrow range with yields little changed on the day.
U.S. YIELDS EASE
European stocks gave up earlier gains to trade close to flat at 1,128.79 as shares in southern Europe dipped following the Spanish bond sale.
The euro was up 0.1 percent against the dollar at $1.3225 after coming under pressure on Wednesday on Moody's Spain warning, while the dollar was steady versus a basket of currencies.
Oil was trading a touch lower at $88.10 and gold rose 0.2 percent.
In the cash market, the yield on the 10-year U.S. 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.
U.S. equity futures were pointing to a slightly lower open ahead of a raft of U.S. data, with the current account, housing starts, weekly jobless claims and the Philly Fed Business Activity index all set for release.
(Additional reporting by Paul Day, Joanne Frearson and Hideyuki Sano, editing by John Stonestreet)