Greek yields hit new lows as debt sale nears

* Greek set to return to market in April - bank sources

* Spain offloads debt at multi-year yield lows

* ECB expected to keep interest rates steady (Recasts and writes through)

By John Geddie

LONDON, April 3 (Reuters) - Greek yields hit fresh four-year lows on Thursday after the country lined up a group of banks to manage its first sale of a new bond since the country restructured its debt two years ago.

The transaction, which is expected later this month, will mark one of the fastest-ever comebacks for a defaulted sovereign. It will also help satisfy investor demand for higher returns, which has helped Greek yields tumble from more than 30 percent after the debt restructuring in 2012.

"The chase for risky assets and yield is as high as it has ever been," said Gabriel Sterne, an economist at the distressed debt brokerage Exotix.

Greece has hired four banks - Deutsche Bank, Bank of America Merrill Lynch, JP Morgan and Goldman Sachs - to manage the sale of a five-year bond intended to raise 2 billion euros, Thomson Reuters markets service IFR reported.

Greek 30-year yields dropped below 6 percent for the first time in four years. Ten-year yields fell 8 basis points to 6.14 percent after the news.

Falling borrowing costs are also letting Greek financial and corporate institutions back into markets. The money they raise should eventually be channelled into the real economy.

"As yields continue to fall, that will have benefits down the food chain, opening up financial channels ... and eventually encouraging its banks to lend again," said Sterne at Exotix.

Taking advantage of the improved sentiment, Greek utility PPC will sell at least 300 million euros of debt later this month, Reuters reported on Thursday. One of the country's largest banks, Piraeus, raised 500 million euro in debt markets last month.

ECB EXPECTED TO HOLD

Spain encountered no difficulties auctioning a total of 5.58 billion euros of bonds on Thursday, through the upper end of the expected range, despite yields near 8 1/2-year lows.

The sale coincided with some encouraging signs of growth in the Spanish economy. Markit's Purchasing Managers' data for March showed services, which make up about half the country's economic output, had expanded for the fifth straight month.

It was not all good news in the periphery, though. Italy's services slipped back into contraction, with PMI data coming in well below expectations. Italian bond futures fell 24 ticks to 121.32 after the data.

This mixed picture and worries about deflationary risks across the bloc are not expected to push the European Central Bank into cutting rates at its meeting later on Thursday, however.

Traders said a marginal widening in peripheral paper on Thursday was further evidence that no action would be taken.

"People maybe got ahead of themselves expecting something a bit more aggressive from the ECB and have been tapering back their expectations over the past few days," a Dublin-based euro zone government bonds trader said.

Italian, Spanish and Portuguese 10-year yields were 4 bps higher on the day at 3.34, 3.31 and 4.05 percent, respectively. Irish equivalents were 2 bps higher at 3.05 percent.

(Editing by Larry King)