EURO GOVT-Bonds underperform Greek debt on rising aid hopes

* Bunds pressured as peripherals gain on Greek aid hopes

* GGBs pare gains; market jitters before Greek Cabinet meets

* Investors await news of Greek bond issue, German supply

(Adds latest prices, fresh comments)

By George Matlock

LONDON, March 2 (Reuters) - Greek government bonds (GGBs) led other peripherals in outperforming euro zone benchmark German Bunds on Tuesday, as investors bet debt-stricken Greece will eventually receive some form of crisis-countering aid.

At one point, the 10-year GGB yield GR10YT=RR fell to fresh two-week lows at 6.048 percent, collapsing the spread over Bunds by 21 basis points to 294 bps -- its narrowest since mid-February. The spread was last at 306 bps. Yields move inversely to bond prices. [ID:nLDE62116Z]

Contributing to the improving sentiment on Greece, the European Union Socialist legislative grouping proposed setting up "a trustee fund", managed by the European Investment Bank, that would prevent defaults by euro zone countries in trouble.

The cost of protecting Greek government debt against default fell to 319,000 euros per 10 million euros of exposure from 344,600 euros at the New York close, according to five-year credit default swap prices from CMA DataVision.

Gains in peripheral euro zone government bonds took the shine off core paper, with German Bunds in particular coming under pressure.

"Bunds are (slightly) lower having woken up to the fact that Greek bond (yield) spreads are 50 basis points lower than (Friday) and CDS have tightened too," said a senior bonds trader in London.

"You get the feeling that there is a safety net or Greece has the money it needs to tie it over the next few weeks as the authorities are now saying they don't need to rush with supply."

At 1652 GMT, the March Bund future FGBLc1 was three ticks lower at 124.30, in after-hours trading, having earlier fallen as low as 123.94. The contract settled at 124.20.

"We have seen a bit of spread widening this afternoon and the Bund technical level of 124.00 has held really well for most of the session," said a dealer in London.

Bond yields were higher across the curve with the two-year Schatz yield EU2YT=RR up 1.6 basis points at 0.871 percent and the 10-year Bund yield EU10YT=RR up 1.2 bps at 3.114 percent.

RELIEF TRADE BUT WEDNESDAY KEY

Market attention was focused on Wednesday's crucial Greek Cabinet meeting and expectations of more austere measures needed to grapple with the country's debt crisis.

EU Economic and Monetary Affairs Commissioner Olli Rehn said on Monday, after meeting Greek officials in Athens, that markets would be convinced Greece will meet its deficit-reduction targets once they saw precise new measures. [ID:nLDE6200TF]

Hours after Rehn's comments, the office of Greek Prime Minister George Papandreou announced a cabinet meeting for Wednesday to "take decisions about the economy". [ID:nLDE6202II]

"We think the next major move will be a relief trade, that there will be some support for Greece or that they'll be able to place a bond issue," said Commerzbank strategist David Schnautz.

"Either way, Greece should feel the relief and this should (become) a burden for intermediate and longer-dated core paper, Bunds in particular. Currently we have a short position in the Bund future."

But while investors awaited news of Greece's planned 10-year bond issue, Bunds were also weighed down ahead of a 5 billion euros German five-year bond auction on Wednesday. [EURODEBT/O]