* Draghi boosts speculation of further ECB easing
* Most euro zone bond yields fall to record lows
* Greece plans to sell three-, five-year bonds in next two weeks (Updates prices, adds new comment)
By Marius Zaharia
LONDON, Aug 25 Yields on most euro zone government bonds fell to record lows on Monday as speculation grew that the European Central Bank was preparing a programme of asset purchases to counter wilting inflation.
Germany, France, Italy, Spain, Portugal, Ireland and others saw their yields drop to all-time lows. Greek yields also fell but remained above this year's troughs; a senior source told Reuters that Athens planned to sell debt soon.
In stronger language than he has used in the past, European Central Bank President Mario Draghi said on Friday at an annual meeting of central bankers in Jackson Hole, Wyoming, that the ECB was prepared to respond with all its "available" tools should inflation drop further.
He said governments could do more to boost demand and pointed out how inflation expectations had dropped over the past month. That increased speculation the ECB will embark on a large-scale asset-buying scheme known as quantitative easing, or QE, to revive inflation.
"The market seems to be attaching a higher probability that the ECB will do QE, and rightly so," said Jussi Hiljanen, chief fixed income strategist at SEB. "Inflation expectations have been dropping like a stone and this is causing increasing concern for the ECB."
German 10-year yields hit a record low of 0.926 percent, before puling back to 0.95 percent. The moves may have been exacerbated by thin volumes on a bank holiday in London and might partly reverse on Tuesday, analysts said.
Euro zone consumer prices grew only 0.4 percent in July and are expected to post 0.3 percent growth in August on Friday, a far cry from the ECB's target of just below 2 percent.
The five-year, five-year forward breakeven rate - the ECB's preferred measure of the inflation outlook, which measures roughly where investors see five-year inflation rates in five years, dropped almost 20 basis points in August alone, to last trade at 1.96 percent. Traders say it is close to its 2010 record lows of around 1.90 percent.
Other measures of inflation expectations have also fallen. Ten-year inflation swaps trade at 1.44 percent, while two-year breakeven rates are negative.
French yields fell as low as 1.29 percent, with the market shrugging off news that the government resigned. President Francois Hollande's office said a new government would be formed on Tuesday.
"There are no real implications from that on the market because the market is in QE mood," said Alessandro Giansanti, senior rate strategist at ING. "The ECB doesn't have any other option left."
Adding to the lacklustre euro zone picture, Germany's Ifo business sentiment index dropped for a fourth straight month in August, amid concern about the Ukraine crisis and the impact of the sanctions and counter-sanctions Russia and the West have imposed on each other.
Despite the deteriorating economic outlook, investors grabbed even the higher-risk bonds in the currency union. The higher probability of QE means that they can hope to sell the bonds to the ECB for a profit.
Spanish and Italian 10-year yields fell more than 10 bps to 2.22 percent and 2.44 percent, respectively. Portuguese yields fell 25 bps to 3.01 percent.
Taking advantage of the renewed demand, Greece aims to re-open its recent three- and five-year bond issues in the next two weeks to raise as much as 1.5 billion euros. But it will take T-bills as payment instead of cash.
"The market is clearly buying the ... idea of QE," said Jean-Francois Robin, global head of strategy at Natixis. (Reporting by Marius Zaharia, editing by Nigel Stephenson and Hugh Lawson, Larry King)