UPDATE 2-Italian yields hover at 3-month lows as traders eye talks in Brussels
* Euro zone periphery govt bond yields http://tmsnrt.rs/2ii2Bqr (Adds news on euro zone recovery)
By Olga Cotaga and Yoruk Bahceli
LONDON, July 7 (Reuters) - Italian 10-year government bond yields clung to recent three-month lows on Tuesday as traders awaited signs of progress from talks this week in Brussels on a European recovery fund.
On Wednesday, German Chancellor Angela Merkel will travel to Brussels to discuss the fund, which investors in Italian bonds hope will be given as grants rather than loans, helping an economic recovery in southern European countries and easing worries they could be saddled with more debt.
"We currently have some thoughts and hopes that there could be a breakthrough concerning the recovery fund," said Daniel Lenz, rates strategist at DZ Bank.
Some European countries have raised concerns about the 750 billion euro fund being offered as grants rather than loans. The European Commission is expected to release an updated proposal on the fund soon.
Italian 10-year BTP yields were last flat at 1.31% , not far from 1.25%, the three-month low they last fell to on Friday.
German 10-year Bund yields were also trading neutral at -0.42%, having touched earlier a six-day low of -0.457%.
Yields remained unchanged after the European Commission said the euro zone economy would drop deeper into recession this year and rebound less steeply in 2021 than previously thought.
Greek 10-year government bonds fell to $1.129, their lowest since Feb. 26. Analysts said a euro zone agreement on new debt relief measures for Greece worth about 750 million euros ($840 million) helped the broader sentiment, but probably did not cause the fall.
Rainer Guntermann, rates strategist at Commerzbank, underlined the difficulty of interpreting day-to-day moves on Greek debt, given the uncertainty around how much the European Central Bank is buying on the day and the illiquidity of Greece's debt market.
"I don't think there was surprise in these measures," he said of the debt relief announcement.
The Greek bond market is seen as illiquid by most analysts., given that a combination of low bond volumes and a low credit rating keeps most institutional investors away.
Austria sold 920 million euros in 10-year bonds and 460 million euros in 50-year bonds issues in the primary market.
Germany raised 585.4 million euros via a 10-year inflation-linked bond.
France hired a syndicate of banks for the sale of a 15-year inflation-linked bond, according to a lead manager notice seen by Reuters. The deal will be launched "in the near future, subject to market conditions", a phrase usually used a day before a sale.
(Reporting by Olga Cotaga, Editing by Peter Graff, Bernadette Baum and Timothy Heritage)
