* Greek yield rises spark concerns of prolonged sell-off
* Investors push back on capital gains tax plans
* Government fragility evident ahead of EU elections (Adds quotes, updates prices)
By John Geddie
LONDON, May 16 Greek bond prices slipped on Friday, deepening sharp falls on Thursday triggered by nervousness about a tax on foreign holders of Greek bonds and the stability of the Greek government.
The rally in Greece's sovereign bonds had been fairly steady since the start of the year, but analysts fear a reversal which started with some hedge funds selling bonds could prove to be more than just a blip.
"If volatility regains momentum, then the risk assessment for other investors may change," BNP Paribas strategist Patrick Jacq said.
The yield on Greek 10-year government bonds rose 13 basis points at 6.95 percent, following a jump of over half a percentage point on Thursday.
Portuguese equivalents also rose 11 bps to 3.82 percent in sympathy with Greece, while traders said some domestic buying helped stop the rot in Spain and Italy which suffered during Thursday's sharp peripheral sell-off.
Italian 10-year bonds were up 3 bps on the day at 3.12 percent, while Spain's were 2 bps higher at 3.03 percent. Irish equivalents were unchanged at 2.69 percent, with some predicting Moody's might upgrade the country for the second time in six months later on Friday.
Pressure on Greek bonds has been widely attributed by traders to a Greek government circular detailing capital gains tax that would apply to non-resident holders of Greek debt between 2012 and 2013.
Greece's government said the document had only sought to clarify that the previous tax regime of 33 percent on foreign legal entities and 20 percent on individuals had been abolished in 2014, although it later withdrew the document.
One hedge fund manager, speaking on condition of anonymity, told Reuters the move was a clear attempt to try to recoup some of the profits that foreign hedge funds had made on Greek bonds in recent years, but was convinced it wouldn't work.
"The whole thing is a non-starter," he said. "Say you are a hedge fund based in the Cayman Islands that makes some money buying Greek bonds, how is anyone in Greece going to know about that? How will they know what the amount is like? And, how are they going to get the money?"
Strategists said the Greek tax regime could have implications for how governments, desperate to balance their widening budget deficits, may look for future private sector contributions. Italy was quick to deny that it had any plans for a retroactive tax.
"The price action was very telling ... it just showed how fast such a stampede can be generated to avoid any such confiscatory actions," said KCG strategist Ioan Smith.
Others pointed out that double taxation agreements in Europe would exempt many investors from such a tax, adding that the shift in market sentiment was more likely a response to Greece's fragile political situation ahead of European elections.
Expected gains for Greek eurosceptic parties in next week's election might erode domestic support for the ruling coalition and potentially trigger a general election.
Also having an impact on sentiment, EU economic growth came in much lower than expected on Thursday, weighed down by shrinking output in Italy and Portugal.
The slowdown is increasing pressure on the European Central Bank to ease monetary policy further, with markets now broadly expecting its June meeting to introduce a package of policies, including cuts in all its interest rates and targeted measures aimed at boosting lending to small- and mid-sized firms.