EURO GOVT-Ireland under pressure, Bunds hit by cost concerns

* Irish/German 10-year spreads hit new euro lifetime high

* German Bund futures erase gains on fears of bailout costs

* Yield curve steeper as flight-to-quality boosts Schatz

By Anna Yukhananov

LONDON, Nov 26 (Reuters) - The yield spread between Irish government bonds and German Bunds hit a euro-lifetime high on Friday, and other peripheral bond yields hovered near record highs on fears the euro zone debt crisis is widening.

Spreads tightened slightly late in the day though, with the exception of Irish spreads, after Portugal passed its 2011 austerity budget and traders said the ECB was buying peripheral euro zone government bonds, adding further support.

German Bund futures were broadly flat on the day, as flight-to-safety flows spurred by the currency bloc's debt crisis gave way to worries Germany would have to shoulder the cost of future euro zone bailouts.

Concerns about Ireland continued to mount following reports senior bondholders may have to shoulder the burden of rescuing Irish banks. [ID:nLDE6AP0BY]

The premium investors demand to hold Irish government bonds [IE10YT=TWEB] over benchmark Bunds widened to 697 basis points.

"Yet again, we've shot ourselves in the foot this morning with the front page of the Irish Times talking about how senior bondholders may have to burden-share in relation to the Irish banks," a trader said.

"If the story is true, Spain and Portugal and Italy and everybody will be feeling the effects of it."

The Bund future FGBLc1 settled 6 ticks higher at 127.35, after trading in a wide 91-tick range.

"The market hasn't made up its mind yet whether this whole uncertainty and debt crisis will be good for Bunds going forward," said Michael Leister, strategist at WestLB.

"Germany may ultimately be dragged into this as well in terms of having to bail out their neighbours. This money obviously has to come from somewhere." <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Take a Look on euro zone crisis [ID:nLDE68T0MG] Graphic on euro zone struggle with debt r.reuters.com/hyb65p Graphic comparing debt-heavy euro zone economies r.reuters.com/zem66q Graphic of euro's correlation with Greek, Irish bond spreads r.reuters.com/paf66q ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

Peripheral spreads, apart from Ireland, tightened in late trade.

The 10-year Portuguese yield PT10YT=TWEB fell from the day's highs after Portugal's parliament approved its 2011 austerity budget, reassuring some investors. [ID:nLDE6AP0F4]

Earlier in the day, a Financial Times Deutschland report said that some euro zone countries and the European Central Bank (ECB) were urging Lisbon to apply for an international rescue package, though European officials denied the report. [ID:nLDE6AP08Y]

The Spanish/German spread ES10YT=TWEB hit a record high of 274 bps earlier in the session as investors fretted about which euro zone country would be next to succumb to bailout funding.

The Spanish spread was last slightly tighter on the day at 253 bps.

In a busy debt supply schedule next week, Spain is expected to pay higher yields to sell bonds, with Italy, France, Germany, Belgium also coming to market. [EURODEBT/O]

LITTLE IRISH RELIEF

Analysts said it was unlikely further details about Ireland's bailout package from the European Union and the International Monetary Fund, expected this weekend, would calm market fears about the debt crisis spreading.

"There doesn't seem to be that much uncertainty left (about the bailout)," said David Schnautz, an interest rate strategist at Commerzbank. "Rumours about Portugal getting pushed to also opt for the rescue mechanism are going to be more closely watched than the small print for Ireland."

Market volatility also pushed some risk-averse investors away from longer duration German debt and into shorter-dated paper in a classic flight-to-quality move, Schnautz said.

The German yield curve steepened on the day, with two-year Schatz yields DE2YT=TWEB 3.4 bps lower at 0.933 percent, while 10-year yields DE10YT=TWEB were flat at 2.677 percent. (Additional reporting by Kirsten Donovan and Emelia Sithole-Matarise; Editing by Susan Fenton)