EURO GOVT-Bunds rise after N.Korean artillery fire reports

* Bunds rise after reports of N. Korean artillery fire

* Focus on Irish budget as political opposition mounts

* Market watches closely as Spain sells T-Bills

By William James

LONDON, Nov 23 (Reuters) - German Bund futures rose on Tuesday, matching a sharp rally in U.S. Treasuries after reports of North Korean artillery fire at a South Korean island pushed investors towards safe-haven government bonds. At 0740 GMT, the Bund future FGBLc1 was 38 ticks higher at 128.32. U.S. Treasuries climbed around 20/32 to a peak of 125-55/64 following reports that North Korea had fired artillery shells at a South Korean island. [ID:nL3E6MN095]

"It's given us a bit of a spurt in line with Treasuries," said a trader.

The two-year Schatz yield DE2YT=TWEB dropped below 1 percent for the first time since Nov. 12 and was last 3.8 basis points lower at 0.996 percent. The 10-year German bond yield DE10YT=TWEB was 2.612 percent, down 3.6 basis points.

In the euro zone, focus remains firmly on Ireland and the successful passage of its austerity budget, with political opposition threatening to keep markets on edge despite Dublin's application for aid from the European Union and International Monetary Fund.

"There's obviously decent conditions attached to any aid package and even vague doubts about getting the budget through are not going to be taken well, so it's not going to help the tone in the periphery at all," the trader added.

Irish Prime Minister Brian Cowen defied mounting pressure to quit on Monday, saying he would stay in office until parliament passed the budget, then call an early election.[ID:nLDE6AL2AG]

The sale of up to 4 billion euros of Spanish T-Bills later in the session should gve some indication of how peripheral issuance is likely to fare while Irish tensions persist, with yields expected to rise.

"Normally two Spanish letras auctions would not be in focus, and to be honest we do not expect them to be significantly troubled, but they will probably be well watched by the broader financial markets given the fraught environment," said Credit Agricole analysts in a note.

Flash purchasing managers' index data for November was also due to be released, with investors looking for any sign of weakness in the strong German economy that has underpinned the euro zone economic recovery.

(Editing by Patrick Graham)