By Melanie Burton SHANGHAI (Reuters) - London copper rallied on Monday, recovering from last week's sell-off, after the safe passage of Greece's austerity bill revived demand for risky assets. Three-month copper on the London Metal Exchange rose 0.75 percent to $8,558 a tonne by 0658 GMT, clawing back some losses from the previous session, when prices fell 3 percent. Copper last week hit its highest level in nearly five months at $8,765 and has rallied 12 percent so far this year, but last week closed lower on the week for the first time since early January. The most-traded May copper contract on the Shanghai Futures Exchange slipped 1.3 percent to 60,760 yuan a tonne. Bonnie Liu, an analyst at Macquarie, said the passage of a deeply unpopular austerity bill through the Greek parliament may have injected some calm into the markets but a further deterioration in Europe's debt saga could send prices lower, given slow demand from top copper consumer China. "Europe's just a mess," said Liu. "After the Chinese New Year, the pace of demand recovery has been slower than expected, so we have seen the physical markets suffer some pressure. "If we want to see prices go to the next stage, then we need to see Chinese demand come back," she said. Greece's parliament approved the austerity bill on Monday to secure a second EU/IMF bailout and avoid national bankruptcy, as buildings burned across central Athens and violence spread around the country. Copper futures prices in China showed that local demand remained slack, with the price differential between London and Shanghai widening to around $400 per tonne from $300 a tonne on Friday as Chinese consumers showed reluctance to step in. Also, the ShFE copper futures curve signalled a lack of spot appetite for metal, with front-month prices trading well below third-month prices since early January, having traded at a premium for most of the second half last year. "We think that the recent rally across metals, which was driven by improved funding conditions and the better than expected US economic data, could lose some steam in the very near-term," Credit Suisse Private Banking said in a note. "However, we would also argue that the downside risks should not be very deep in light of the encouraging macro economic backdrop compared to only a few months ago." Some U.S. fund managers, however, continue to buy copper. Money managers in gold, silver and copper futures and options raised their net long positions in the week of February 7, as investor interest in the three metals continued to recover after a recent disappointing performance. Top aluminium producer RUSAL Plc said on Monday that it expects more companies to cut aluminium output this year, with China accounting for about a third of global cuts, but still forecast that global output would top demand. But excess capacity in aluminium smelting will drag on for years to come, even while losses weigh on producers, as political pressures in China and Russia to keep jobs and push self-sufficiency prevent or delay plant closures.

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