EURO GOVT-Austrian yields hit record lows, French plunge

* Austrian 10-year yields hit record lows

* French, Belgian yields hit lowest since October 2011

* Data shows Germany not immune to crisis

By Marius Zaharia and Ana Nicolaci da Costa

LONDON, May 24 (Reuters) - Austrian government bond yields hit record lows, while French and Belgian yields plunged on Thursday as investors sought returns in an expensive market where even 30-year German bonds are yielding record lows below 2 percent.

Widespread uncertainty over Greece's future in the euro and Spain's struggling banking sector has been fueling flows into safe haven assets and drove longer-dated German yields to record lows yet again.

But demand for other relatively safe bonds which offer better returns has increased.

The rally was led by France, whose triple-A sovereign credit rating has been reaffirmed by Moody's, albeit with a negative outlook. Ten-year French yields dropped 20 basis points to 2.54 percent, their biggest daily drop this year.

This mood yields on Austrian and Belgian debt lower as well, with those countries being placed in the same "semi-core" category by many investors - a group perceived as riskier than countries such Germany, Finland and the Netherlands.

"There's increased demand from (global) central banks and others for French debt, which is a better yielding alternative to Bunds," one trader said. "We've had some big orders, these triggered stop losses and hence the big move."

Austrian 10-year yields dropped 14 bps to 2.285 percent, while equivalent Belgian yields were 16 bps lower at 3.21 percent.

The moves in those markets came mainly after German 10-year yields hit a record low of 1.351 percent even as data showed the euro zone powerhouse was not immune to the sovereign debt crisis.

Germany's manufacturing sector shrank at the fastest rate in three years and German business sentiment collapsed in May.

"It looks like someone had woken up and said 'I could double my yield somewhere else'," said David Keeble, global head of fixed income strategy at Credit Agricole.

"You're not getting any yield in Germany. We're scared and we're trading so far away from any ... fundamentals, it's crazy. We're in a flow-based emotional market ... so the risks (of a correction) are substantial."

UP THE CURVE

In their search for yield, investors also moved up the German curve. Thirty-year yields broke below 2 percent for the first time ever on Wednesday and fell more on Thursday to 1.988 percent.

For two-year German bonds, investors get 0.02 percent.

"The fact that short-term yields are at zero (means) investors have to move further (up) the curve to find some yields and that is driving the huge bullish flattening, with 10-year and 30-years benefiting from this type of movement," Alessandro Giansanti, senior rate strategist at ING, said.

He said the 10-year German yield could still fall another 10 bps between now and the Greek elections in June - which analysts expect will determine the fate of its membership of the euro.

Trade was expected within ranges before the vote as nerves remained stretched. After an informal summit on Wednesday, European Union leaders urged Greece to implement the reforms required by its bailout programme.

On the other hand, they have been advised to make contingency plans in case Greece didn't and had to leave the euro.

"Before the national elections in Greece I don't think we will see major trends in either direction," said Norbert Wuthe, senior government bonds strategist at Bayerische Landesbank.

"I do see the possibility of 1.30 percent given volatile market reactions to the news flow... and the upper band should be something like 1.50 percent."