EURO GOVT-Bunds hit new highs on Greek aid worries

* Greece in focus, market frets about next aid tranche

* Bunds set to rise further in uncharted territory

* Threat of French banks, Italy downgrades also hit risky assets

* Non-event G7 offers little hope for decisive policymaking

By Marius Zaharia

LONDON, Sept 12 (Reuters) - Question marks over an aid tranche for Greece, growing talk of a Greek default and threats of ratings downgrades for French banks and Italy pushed German Bund futures to fresh contract highs on Monday.

With a Group of Seven finance summit having delivered no immediate steps to resolve the euro zone debt crisis, German debt prices looked set for more gains.

Senior German politicians have begun talking openly about a Greek default, while uncertainty remains about the level of participation in Greece's debt swap and about a row with Finland its demand for collateral in exchange for more aid.

"The Greek situation is dominant, chances of some sort of default have increased -- the Germans seem to be hinting at that -- so risk is off," one trader said.

The December Bund future was last 68 ticks higher at 138.45, having hit a contract high at 138.56. Ten-year Bund yields were down 5 basis points at 1.72 percent.

Greece introduced a new tax on real estate on Sunday in a bid to bring its 2011 budget back on track and meet the conditions of its bailout deal.

The move was praised by the European Commission days before EU and IMF inspectors arrive in Athens to hear the government's response to delays and missed fiscal targets before approving an 8 billion euro tranche of its bailout.

However, markets were not impressed.

"The market still remains nervous about the debt exchange and the ongoing spat with Finland ... so unless you see some better news then clearly Bund yields are set to fall further, possibly towards 1.5 percent," said RIA Capital Markets strategist Nick Stamenkovic.

He said the next key events to watch were Italian and Spanish debt auctions this week, which will test the European Central Bank's drive to buy government bonds and keep the crisis from spreading to large economies.

Uncertainty over its appetite for more bond purchases was heightened by Friday's unexpected resignation of the ECB's chief economist Juergen Stark. ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

ECB bond buying and bond yields

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Italy plans to sell up to 7 billion euros worth of debt on Tuesday, while Spain plans to issue up to 3.5 billion euros of bonds on Thursday.

"Given the general lack of genuine demand ... the question should be asked by the market even louder: who will buy the next bulk of 'Tier 2' bonds but the ECB in indirect fashion?" Commerzbank strategist David Schnautz said in a note.

"As hard as the answer is the more it warrants long positions in Bunds."

The Italian 10-year bond yield <IT10YT=TWEB rose 11 bps to 5.53 percent, widening the spread versus Bunds by 14 bps to 380 bps. The equivalent Spanish bond yielded 12 bps more on the day at 5.29 percent, some 354 bps over Bunds.

The ECB is due to reveal at 1330 GMT the amount of bonds it purchased last week and offer hints about how much firepower is needed for Italian and Spanish bonds to counter supply pressure.

"The question really is how much they are going to buy in the future ... markets are nervous about ECB support going forward," RIA's Stamenkovic said.

Adding to euro zone worries, France's top banks were bracing for credit rating downgrades on worries over their Greek exposure, with Societe Generale shares falling 10 percent on Monday.

Moody's is also expected to finalise its ratings review of Italy this week.

"A one notch downgrade would not be a surprise, but more than two notches clearly would be bad news," Nomura strategists said in a note.

A closely watched G7 meeting produced little to calm markets. It pledged to make a coordinated response to a slowdown in the global economy, but signalled no shift in policy and members differed in emphasis on the euro debt crisis. (Graphic by Scott Barber, editing by Nigel Stephenson)