EURO GOVT-Peripherals outperform on Greek deal talk

* Peripherals outperform on speculation about Greek deal

* Bund futures retreat from 3-wk highs, seen over valued

* Next stage of ECB's exit plan expected on Thursday

By Kirsten Donovan

LONDON, March 1 (Reuters) - Greek and other peripheral euro zone government bonds outperformed German Bunds on Monday on signs that Athens might be nearing a deal with European Union governments to ease the country's debt crisis.

EU Economic Affairs Commissioner Olli Rehn was due to visit Athens on Monday for talks with Greek officials about the crisis, which has rocked Europe's debt market and undermined investors' confidence in the common euro currency.

The market speculated that Rehn's visit, if successful, could move EU governments closer to announcing some form of emergency aid for Greece in exchange for a pledge by Athens to take fresh budget steps. [ID:nLDE61R0BX]

German Bund futures retreated from three-week highs and the 10-year Greek bond yield spread over Bunds narrowed as much as 35 basis points to 302 bps, the least since mid-February.

Other peripheral debt also outperformed, with the Spanish 10-year spread down 6 bps at 71 bps and the Italian spread narrowing 6 bps to 84 bps.

"We seem to be getting closer to a deal on Greece in some shape or form," said Nomura rate strategist Sean Maloney.

"That being the case it's pretty clear that markets such as Germany are heavily overvalued and we're seeing a reversal of the flight-to-quality flows that have been backing us up for so long."

On Saturday, a German member of the European Parliament said Germany, France and the Netherlands plan to buy Greek bonds to help Athens cope with a severe debt crisis.

The cost of insuring against a Greek default fell to 336,500 euros per 10 million euros of exposure from 364,000 at the New York close, according to 5-year CDS prices from CMA DataVision.

Other peripheral CDS prices also fell, although not to the same degree, and the SovX index of Western European CDS prices narrowed to 83.5 bps from 90 bps at Friday's close.

At 0908 GMT, March Bund futures FGBLH0 were 26 ticks lower than at Friday's settlement close, at 124.19. Two-year bond yields EU2YT=RR were a basis point higher at 0.886 percent, with 10-year yields EU10YT=RR 2 bps higher at 3.126 percent.

Markets are awaiting Greece's expected syndicated bond sale, but Nomura's Maloney said he expected Athens to wait until there was more concrete news on any rescue package.

DEBT MOUNTAIN

Already sitting on a mountain of debt and staring at a budget deficit of 12.7 percent of gross domestic product - more than four times the amount allowed under European Union rules - Greece needs to raise about 12 billion euros to bide its coffers over to the end of April and 20 billion euros by end-May.

"We expect that Greece will be able to obtain funding -- albeit at very unfavourable conditions -- and Bunds, especially in the medium and longer maturity sectors, will lose ground as tensions ease," Commerzbank strategists said in a note.

Away from Greece, Germany, France and Spain are set to sell up to 18.5 billion euros of bonds this week but the end of a multi-week cash drought may support the issuance [EURODEBT/O].

Another focus this week will the European Central Bank's policy meeting on Thursday, when the bank's President Jean-Claude Trichet is expected to detail the next stage of the exit from extraordinary stimulus measures.