* ECB's Draghi says stronger euro may trigger more easing
* Bunds, low-rated euro zone yields fall
* Greek yields edge up as market-comeback frenzy fades (Adds fresh comments, updates prices)
By Marius Zaharia
LONDON, April 14 Yields on government debt fell across the euro zone on Monday, with those on German Bunds hitting 10-month lows after European Central Bank chief Mario Draghi said a stronger euro might trigger further monetary easing.
Helping pull the euro back from its strongest levels in a month, Draghi gave his clearest signal yet over the weekend that the ECB was prepared to conduct a stimulative asset-purchase programme.
Draghi's French colleague, Benoit Coeure, cautioned that purchases of a single asset class, such as government bonds, might not have the desired affect. But he hinted that any asset purchases would be linked to interest rates in the intermediate to longer part of the yield curve.
Even though several ECB policymakers have expressed deep reservations about pursuing a U.S.-style programme of sovereign asset purchases, it was longer-term government bonds that reacted strongly on Monday.
"The performance seems to be confined to the five- to 10-year maturities rather than the front end, suggesting investors are playing the closest attention to comments around quantitative easing," said Alessandro Tentori, global head of rates strategy at Citi.
Quantitative easing is jargon for central banks buying assets with newly printed money.
German 10-year Bund yields, the benchmark for euro zone borrowing costs, dipped to a 10-month low of 1.491 percent before paring those gains.
Italian 10-year bond yields fell 4 basis points to 3.18 percent, within touching distance of record lows. Spanish yields fell 5 bps to 3.14 percent.
Strategists say the ECB's readiness to intervene has bought time for countries like Italy to implement reforms, keeping open the taps of cheap bond-market funding.
Retail investors have already placed more than 5 billion euros of orders for a new Italian inflation-linked bond on Monday. The notes go on sale to institutional accounts later in the week.
"Italy has to deliver on its growth promises, because this line of credit will not be open forever," said Sergio Capaldi, a fixed income strategist at Intesa Sanpaolo.
Italian Prime Minister Matteo Renzi stepped up calls for more flexibility around the European Union's budget limits last week, saying the current framework is hurting growth and costing jobs.
Italy's budget deficit has met the EU's budget deficit target, 3 percent of gross domestic product, for the past two years. But its public debt, the second highest in the euro zone after Greece's, has risen steadily.
GREEK YIELDS RISE
Greece was one of the few markets in which yields rose on Monday, as investors booked profits on the strongest bond rally in the euro zone this year. Ten-year yields added 16 bps to hit a day's high of 6.47 percent on Monday.
There was further selling pressure on Greece's new five-year bond issued on Thursday, a deal that marked its return to bond markets just two years after restructuring its debt.
Some analysts said the bond's pricing at 4.95 percent was too aggressive, leaving no room for a further dip in yields in secondary markets. The new bond last yielded 5.17 percent. (Reporting by Marius Zaharia and John Geddie; Editing by Larry King)