* Greek yields extend recent falls
* Portugal buys back 50 mln euro of 2015 bonds
* Buyback is second such move so far this year
By Marius Zaharia and Emelia Sithole-Matarise
LONDON, March 18 (Reuters) - Greek yields fell sharply on Tuesday after Athens and international lenders struck a deal to unlock the next tranche of emergency loans following protracted negotiations.
The deal comes after six months of talks between Greece and its lenders - the European Commission, the European Central Bank and the International Monetary Fund - on the reforms Athens had to implement to get more money.
Greek 10-year yields slid 19 basis points to 6.86 percent and 30-year bonds yielded 6.70 percent, down 17 bps on the day. They resumed a downward trek that was interrupted last week when the bailout review talks looked set to drag on until the end of the month.
"It's encouraging ... that the loan disbursement issue was sorted out. That was arguably causing additional uncertainty with regards to Greece," ICAP strategist Philip Tyson said.
While junk-rated Greek bonds still offer higher yields than the rest of the euro zone, their current pre-bailout levels suggest improved confidence that the worst of the region's sovereign debt crisis was over.
Volumes have also been picking up in a bond market that most investors deserted in 2010 when the crisis erupted. By March 11, investors had traded some 888 million euros of Greek government bonds - almost 60 percent of the total for the whole of 2013, Greek central bank data showed. This compares with 680 million in 2012, when Greek debt was restructured.
"Investors are hunting for yield and are probably comfortable dipping their toes back into the Greek market," said Michael Leister, a strategist at Commerzbank.
The improved market tone is also leading some Greek officials to consider issuing bonds earlier than the second half of the year that Athens has hitherto flagged.
Risks remain, though, and 10-year Greek yields are still above their longer-dated counterparts. A yield curve that inverts like this usually points to debt investors fearing they might not be repaid in full.
"There is still uncertainty regarding debt sustainability over the medium- and long-term and this won't change easily," said Cyril Regnat, fixed income strategist at Natixis in Paris.
"It will take at least 2-3 years to see a steep curve like in Spain and Italy."
Yields on junk-rated Portuguese bonds also fell sharply as Lisbon bought a smaller-than-expected 50 million euros of a 2015 bond in a reverse auction aimed at fostering confidence the country can fund itself after it exits its bailout this year.
The amount repurchased was miniscule compared with the 1.32 billion euros of October 2014 and October 2015 Portugal bought back in a similar reverse auction last month.
While it failed to improve its redemption profile, the tiny buy-back signalled many holders of those bonds believed the rally in Portuguese bonds looked set to continue.
"To me the fact that they (investors) only sold 50 million is not bad news. The fact that investors don't want to get rid of (the bonds) is actually a good signal," said Regnat at Natixis. "Any investor holding Portuguese bonds is holding a valuable asset."
Portuguese 10-year yields fell 10 bps to 4.47 percent, within a whisker of four-year lows hit last week.
Portugal's 78 billion euro bailout by the EU and IMF expires in May. Questions remain, however, as to whether Portugal can make a clean break from the aid programme agreed in 2011 and do without a safety net, in the form of a precautionary credit line, in case it gets into financial trouble.
The rejection late on Monday by Portugal's opposition Socialists of an agreement with the government on a long-term plan to reduce the budget deficit was seen having little impact for now on demand for the country's bonds.
Other euro zone bond yields were a touch lower after the German Constitutional Court, as widely expected, upheld a 2012 verdict giving the green light to the euro zone's bailout fund, the European Stability Mechanism.