By Paul Day

MADRID, Feb 7 (Reuters) - Political uncertainty over a corruption scandal and concerns over the state of the economy will dampen investors' appetite for Spanish bonds at auction on Thursday, with yields seen rising for the first time this year.

Spain's Treasury has enjoyed strong demand for its debt so far in 2013, raising around 14 percent of its full-year medium- and long-term funding target through two auctions and a syndicated placement, and paying its lowest yields in a year.

Investor interest, from both at home and abroad, helped bring down funding costs on the benchmark 10-year bond in mid-January to levels not seen since March last year. However, the corruption scandal has pushed yields back up to mid-December levels.

Prime Minister Mariano Rajoy has denied any wrongdoing in a graft scandal involving a former treasurer of his People's Party, Luis Barcenas, and few analysts see the affair breaking his absolute majority control of parliament.

'A lot of people are out there saying the crisis is over, but that is a little premature. You need both the economics and the politics to be supportive, but it's not obvious, running in to the election in Italy, deficit data in Spain and now the political problems, that everything is going to be smooth sailing,' said Harvinder Sian, rate strategist at RBS.

Spain, the euro zone's fourth largest economy, spent last year at centre of the bloc's debt crisis on concerns it cannot control its finances and would be too expensive to bail out.

The government has said it will reduce the public deficit to 4.5 percent of gross domestic product this year from over 9 percent of GDP in 2011, though many doubt it can be done without

condemning the economy to an even deeper downturn.

A pledge by the European Central Bank to buy debt on secondary markets of members which request aid has slowed a bond sell-off which pushed yields to euro-era highs in the summer, even though Madrid has been unwilling to apply for help.

While the ECB backstop has helped cheapen the country's visits to international debt markets, many economists fear a prolonged recession and record-high unemployment mean investor confidence will be short lived.

The Treasury aims to raise between 3.5 billion euros and 4.5 billion euros ($4.7 billion-$6.09 billion) at the auction of 2015, 2018 and 2029 bonds on Thursday.

The bond maturing on March, 31, 2015, which was introduced Jan. 10 at an average yield of 2.476 percent, was raising 2.75 percent on the secondary market on Wednesday, a good indication of likely yield at auction on Thursday.

The bond due on Jan. 31, 2018, last sold at a primary auction mid-January at an average yield of 3.770 percent. The same bond was trading on the secondary market at around 4.1 percent.

The paper due on Jan. 31, 2029, last sold at auction in January 2010, though was trading on secondary markets at a yield of 5.7 percent on Wednesday. ($1 = 0.7392 euros)

(Reporting By Paul Day; Editing by Giles Elgood) Keywords: SPAIN DEBT/

(paul.e.day@thomsonreuters.com)(+34 91 585 83 08)(Reuters Messaging: paul.e.day.thomsonreuters.com@reuters.net)

COPYRIGHT

Copyright Thomson Reuters 2013. All rights reserved.

The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.