UPDATE 3-Greece's 10-year bond yield hits eight-year low

* Analysts say Greece could return to market at these levels

* U.S. tensions push German borrowing costs near 3-month lows (Updates prices, adds comment)

LONDON, Dec 6 (Reuters) - Greece’s 10-year government bond yield hit an eight-year low below 5 percent on Wednesday as recent upbeat economic data and a deal struck with its lenders encouraged investors to snap up Greek debt.

Greece and its euro zone creditors reached a preliminary agreement at the weekend on reforms Athens needs to roll out under its bailout programme, a move that could pave the way for the country to leave the aid plan in August.

“Broadly, things are settling down for Greece and there is a sense that the worst of the crisis is over,” said Matthew Cairns, a rates strategist at Rabobank in London. “At the same time the market is hunting for yield and looking at the periphery.”

The yield on Greece’s 10-year government bond fell around 5 basis points to 4.802 percent, its lowest since November 2009.

Analysts said the fall in bond yields could encourage Greece to return to the market with new bonds.

Greece successfully sold debt to private investors for the first time in three years in July, making a significant first step towards financial independence when its third international bailout ends next year.

Data earlier this week showed Greece’s economy expanded for a third straight quarter in the July-to-September period, driven by stronger tourism and higher government spending.

“If creditors are happy with the progress on Greece’s bailout, then it’s not surprising that yields are falling,” said Chris Scicluna, head of economic research at Daiwa Capital Markets.

Most other euro zone bond yields were 1-3 bps lower on the day, pushed down by political tension in the United States and a continued flattening of the U.S. Treasury yield curve.

German 10-year bond yields fell to a three-month low at 0.29 percent.

Concerns about the progress of a tax reform bill and a U.S. federal investigation into suspected Russian interference in the 2016 presidential election have added to market uncertainty.

Traders said all of this was boosting demand for German bonds, considered one of the safest financial assets in the world, as well as other well-rated euro zone government debt.

Elsewhere, Germany sold 1.62 billion euros of 10-year bonds and Portugal swapped more than 1 billion euros of bonds expiring in 2019 and 2020 for five- and 10-year paper, extending the maturity of its debt profile.

ECB board member Yves Mersch, meanwhile, said on Wednesday that the European Central Bank should start planning the end of its bond-buying programme since the economic recovery will make such stimulus unnecessary.

Reporting by Fanny Potkin and Dhara Ranasinghe; Editing by Mark Heinrich