* Greek bonds rally half a cent on debt buy-back prospects * Investor sentiment remains cautious, Bund selloff minimal * Spain to re-enter spotlight in 2013 as funding task resumes By William James and Emelia Sithole-Matarise LONDON, Nov 27 Greek bonds rallied on Tuesday after international lenders agreed a plan to cut Athens' debts, but even though safe-haven bonds slipped the deal failed to spark a sea-change in investor sentiment. The accord will cut Greek debt by 40 billion euros, reducing it to 124 percent of gross domestic product by 2020 and paving the way for Athens to receive its next aid tranche in mid-December. Greek bonds rallied half a cent to 34.8 cents, nearing their highest price since being issued earlier this year during a debt restructuring. However, market participants said the rally was not built on confidence that the latest deal had put Greece on a more sustainable track, but instead reflected one of the more vague elements of the plan: a proposed buy back of Greek debt. "In the short term this (buy-back) will reduce stress on the Greek government bonds but this doesn't solve the main issue of the sustainability of the debt to GDP ratio," said Alessandro Giansanti, strategist at ING in Amsterdam. The International Monetary Fund said it would only pay out its share of Greek aid once a buy-back, which reduces Greece's debt because the bonds can be bought at a deep discount on their face value, had been completed in the coming weeks. Officials have previously talked of a 10 billion euro programme to buy debt back from private investors at about 35 cents in the euro, but investors were given little new information on how purchases would be paid for. Reflecting investors' underlying caution, safe haven German Bund futures recovered from knee-jerk early losses of up almost 60 ticks to settle just 20 ticks lower at 142.23. SPAIN TO THE FORE Nevertheless, the lighter market mood helped Spanish 10-year bond yields extend their recent decline by 8 basis points to hit a one-month low of 5.55 percent. With the risk of an imminent Greek default off the table for now, focus is likely to return to the euro zone's wider problems of recession and high debt levels, analysts said. "Growth is the key issue. The euro will survive intact if the periphery can return to growth," said Chris Scicluna, head of research at Daiwa Capital Markets. That is likely to put Spain, where such problems are particularly acute, and its decision over whether to seek a bailout programme back in the spotlight. But, a renewed wave of Spanish selloffs and a marked flight to quality assets was not seen as imminent. Spain is fully funded for 2012, benefiting from the European Central Bank's promise to support struggling peripheral countries by buying bonds if they request a bailout programme. "The issue is moved back to next year, the first or second quarter. The focus will be when they announce how much they want to issue next year... that will be the critical point," ING's Giansanti said. In 2013, Spain is expected to increase its reliance on bond markets by up to 20 billion euros to finance budget slippage and support the country's struggling regions. An average of major banks estimates put next year's gross Spanish issuance at 106 billion euros compared to 86 billion in 2012.