EURO GOVT-Peripheral debt pounded, little relief for Ireland

* 85 bln euro package for Ireland does little to ease market

* Peripheral bond yields rise; Italy, Spain under pressure

* Bund futures fall as bailout cost worries hit core debt

By William James

LONDON, Nov 29 (Reuters) - Ireland's 85-billion-euro rescue package failed to convince bond investors on Monday as Irish yields rose and a lacklustre Italian debt auction highlighted growing concern about the euro zone's debt crisis. Germany and France said Europe had taken decisive action to save the euro by rescuing Ireland and paving the way for a permanent system to resolve the region's debt crisis.

But markets showed no inclination to ease pressure on the euro zone's other higher-yielding states.

The rising likelihood that Portugal and possibly other euro zone states will require expensive bailouts and increase the burden on Germany, hit Bund futures FGBLc1 which settled 28 ticks lower at 127.07.

Irish bond yields reversed an early fall to end the day higher at 9.6 percent and on course to complete the largest monthly rise since at least 1992, according to Reuters data.

"Concern in the market is that other countries will have to ask for support soon ... it is definitely a bear market in those countries' bonds," said UniCredit strategist Kornelius Purps.

That concern was evident at an Italian debt auction where investors demanded a yield around half a percentage point higher than at similar sales a month ago. [ID:nLDE6AS0M1]

Yields on Italian IT10YT=TWEB and Spanish ES10YT=TWEB 10-year debt each jumped by more than 20 basis points -- their biggest daily rise in more than a decade. Italian and Spanish spreads over Bunds hit new euro-lifetime highs. [ID:nWEA4872]

Portuguese credit default swaps hit a record high and though yields were broadly steady against German paper on the day, the spread against Bunds remained elevated at 450 bps, with little sign of buyers returning to the market.

"As we go to the end of the year there are few pension funds, insurance companies or banks who are willing to purchase Portuguese, Spanish government bonds," Purps said. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

For a series of graphics on the euro zone's debt crisis,

click on the following links:

* Euro zone struggles with debt r.reuters.com/hyb65p

* Euro zone peripheral economies r.reuters.com/zem66q

* CDS curves r.reuters.com/xyq76q ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

Fears the debt and banking crisis that pushed Ireland into the arms of the EU and IMF could spread to other euro zone countries and result in further costly bailouts capped demand for German Bunds.

"The fact that even German debt trades poorly, reflects the fact that one way or another Germany will end up paying more. The only hiding place is Treasuries and, to a lesser extent, (UK) gilts," Harvinder Sian, rate strategist at Royal Bank of Scotland, said in a note.

Ten-year German debt underperformed U.S. Treasuries in the cash market, narrowing the yield spread to 7 bps.

A flight into German paper was more evident in two-year Schatz bonds, where yields fell 0.5 bps to 0.917 percent, steepening the curve as 10-year yields rose 1.5 bps to 2.696 percent.

PERMANENT RESOLUTION

A new European Stability Mechanism (ESM) outlined on Sunday would make private investors share the pain in the case of a debt default or restructuring, but only on debt issued after 2013. [ID:nLDE6AR03X]

"As restructuring remains an explicit threat and as IMF/ESM bonds enjoy a preferred creditor status, spreads look set to remain structurally wide over the medium term," said Commerzbank strategist Christoph Rieger.

Ireland's loans under its bailout agreement will run for an average of 7.5 years. The EU also agreed to extend the maturities on Greece's three-year rescue package to the same date.

Belgium also sold 2.0 billion euros of fixed-rate bonds in an auction of four, 10 and 25-year debt. [ID:nLDE6AS0XB] The Belgian 10-year yield spread over German Bunds climbed 20 bps on the day to 121 bps, the widest since February 2009.

(Additional reporting by Kirsten Donovan and Amanda Cooper; Editing by Susan Fenton)