* Spanish yields rise as supply influx cools demand * Greek deal seen driving investor back to risky assets * Few surprises seen at ECB meeting, rate comment eyed By William James LONDON, Feb 9 (Reuters) - Spanish government bond yields rose on Thursday as a surprise debt issue the previous day cooled investor demand, though any progress towards Greece receiving bailout funds was likely to increase appetite for risk. The European Central Bank's policy announcement, due at 1245 GMT, was set to play second fiddle to developments in the Greek saga, with few expecting the bank to cut interest rates or unveil new liquidity measures to support the banking sector. German debt futures stalled as markets cautiously anticipated the release of bailout funds - despite Greek leaders failing to agree their part of the deal. Spanish 10-year yields were 7.6 basis points higher on the day at 5.321 percent after Madrid maintained its aggressive 2012 fund-raising activity with an opportunistic 4 billion euro syndicated debt sale on Wednesday. "There was obviously some repricing of the Spanish curve. Four billion euros in the 10-year (sector) is quite a big chunk to digest, so it's not too surprising that we see some after effects," said David Schnautz, strategist at Commerzbank. Nevertheless, market participants said the Spanish sell-off could be short-lived if Greece secured the international aid it badly needs, reducing the risk of a messy Greek default and the subsequent contagion to other euro zone strugglers. "Certainly, that (an agreement) would be risk positive and there still would be a knee-jerk reaction," said Peter Chatwell, rate strategist at Credit Agricole in London. Euro zone finance ministers, due to meet on Thursday evening, had hoped for a complete agreement from Greek party leaders on budget cuts to speed approval of the 130 billion euro bailout, the country's second. But, despite agreeing most of the required cuts, Finance Minister Evangelos Venizelos left Athens for the Eurogroup meeting in Brussels with one issue unresolved. However, markets took the fact that a single hurdle remained in the drawn-out process of agreeing the reforms demanded by international lenders as positive. An accord has been priced in over recent days, with safe-haven German yields ticking higher. "Our target is that the (10-year) yield should be in the area of 2.15 percent so we see some pressure to the upside if there is a positive outcome to the Greek debt situation," said Alessandro Giansanti, rate strategist at ING in Amsterdam. The 10-year yield was last at 1.99 percent, down 1.0 bps on the day after struggling to break conclusively above the 2 percent level which has formed the upper limit of a roughly 20 bps range seen since the start of the year. Bund futures were flat at 137.84. With expectations of a Greek deal having been high for some time, the scope for a sustained Bund sell-off was limited and, beyond the knee-jerk reaction, some were doubtful the risk rally would hold for long. "The longer it does drag on, the more likely Bunds are to go up because people will start to get a little bit nervous and tired," a trader said. "That's still not the end of the story: it's not going to be the magic wand that makes things better." CENTRAL BANK SIGNALS The ECB may indicate willingness to cut rates next month. Its reluctance to pre-commit meant the main risk was that it would rule out a cut, leading to a pricing out of the partial expectations indicated by Euribor futures. ECB President Mario Draghi was expected to face questions on whether the bank was considering taking losses on its holdings of Greek government bonds to help cut Athens's debts. Any sign of concession would be seen as positive for riskier assets, Credit Agricole's Chatwell said.

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