EURO GOVT-Bonds gain on U.S. QE talk, Greece, Ireland tighten

* Bunds rise, supported by U.S. QE expectations

* Periphery supported by Chinese comments

* But Belgian/German debt yield spread widens

* France, Netherlands sell T-bills as short yields rise

(Updates to settlement close)

By George Matlock

LONDON, Oct 4 (Reuters) - German government bonds rose on Monday, following U.S. Treasuries which gained after Federal Reserve officials hinted they would support the central bank buying more bonds to bolster the sluggish U.S. economy.

After the settlement close in Europe, the Bund future FGBLc1 extended gains to 131.88, up 57 ticks on Friday's close, after Brian Sack, the head of the New York Fed's markets group, stoked expectations about bond buying when he said such action could ease financial conditions. [ID:nNLL4LE6IR]

New York Fed President William Dudley said on Friday current conditions of high unemployment and low inflation were "unacceptable", while Chicago Fed chief Charles Evans said more easing was "desirable". [ID:nN01261676]

The prospect of further monetary easing helped the two-year U.S. Treasury yield US2YT=RR hit a new record low. [US/]

"The expectation that the Fed, and possibly the Bank of England, will restart quantitative easing is supporting government bonds in general," said Nick Stamenkovic, rate strategist at RIA Capital Markets.

Even stronger-than-expected U.S. housing data did not dent the Bunds' rally, as investors remained worried the world's biggest economy is slowing. [ID:nN04225523]

"With underlying economic conditions still so weak, a robust housing recovery remains highly unlikely. Housing activity will remain weak for a number of years yet," Paul Dales, economist at Capital Economics said.

But while Bunds - core euro zone debt assets - rallied it did not lead to a wholesale burgeoning of peripheral debt yield spreads. In fact, Greek GR10YT=TWEB and Irish bonds IE10YT=TWEB outperformed after supportive comments from China, helping to tighten spreads.

Helping the Irish spread tighten, Irish pension funds said they wanted a change in their annuity pricing which would lead to more Irish bond buying by such investors. [ID:nLDE69313U]

China pledged on Sunday to support a stable euro and not reduce its holdings of European government bonds [ID:nLDE69204K] and the Sunday Times reported Irish pension funds could buy 20 billion euros of Irish bonds.

The Irish/German 10-year spread narrowed 17 bps to 410 bps. "We are seeing real money accounts back and the talk about China willing to buy Greek debt is helping overall sentiment," Eamon Reilly, a dealer at Davy Stockbrokers in Dublin, said.

The Greek bond yield spread fell 20 bps to 784 bps and the cost of insuring against a default was almost 20 bps lower, according to monitor Markit, after China pledged to buy Greek government bonds when debt-laden Athens resumes issuance.

BELGIAN CRISIS PRODS WIDER SPREAD

One yield spread widened. The Belgian/German spread widened by five bps to 88 bps on raised domestic political risks after the legislature's largest party, the Flemish separatist N-VA walked out of government-forming talks which it said needed to start from scratch. [ID:nLDE6931IQ]

"These were pretty strong comments from the N-VA so we think it means there will be political uncertainty for some time. We see the Belgian spread widening to 100 basis points within the next two weeks and recommend taking any OLO strength to switch into Austria, France or Italy," Marcel Bross, bond strategist at Commerzbank said.

Markets also kept an eye on rising cost of credit. Banks took less cash than expected from the European Central Bank last week, reducing excess liquidity in the system and pushing short-term rates higher.

On Monday, those rates rose further [ID:nLDE6931PY] and attracted higher yields at tenders of short-dated Dutch and French T-bills. [ID:nTAR01173] [ID:nAAT010299]

Conversely, two-year German 2-year bond yields DE2YT=TWEB were down 2 basis points at 0.836 percent and 10-year yields DE10YT=TWEB were down 4.2 bps at 2.224 percent. (Editing by Tim Pearce)