* Bunds dip but Greek concerns limit losses * Test of highs seen possible if Greece fails to deliver * Italy sells zero-coupon, inflation-linked bonds By Kirsten Donovan LONDON, Feb 24 (Reuters) - German government bonds dipped on Friday but looked primed for a further rally driven by concerns over euro zone growth and the implementation of Greece's latest rescue deal. Bund futures retreated from one-week highs hit on Thursday as equities rose but were well supported with a test of the top of the year's trading range above 140 in futures seen likely given that few in the market are convinced problems in Greece or elsewhere in the shared currency area have been put to bed. "The downside seems very well protected given the overall disappointment and uncertainty regarding Greece," said Michael Leister, rate strategist at DZ Bank. "So the question is what could trigger a break to the upside... The market is very much biased to the negative given Greece's track record (at implementing reforms)... so any breakdown in talks, for example if Greece doesn't deliver on the conditions laid out in the package." Greece launches a bond swap on Friday, the first step towards securing funds from the 130 billion euro bailout package agreed earlier this week, while domestic growth stays hobbled by harsh austerity measures and opposition in Germany grows. "Peripheral wobbles could be coming back to haunt us," a trader said. "There's a lot of good news in there already as January was a periphery short-covering month and the rally went a long way so we're vulnerable to bad news." March Bund futures were 12 ticks lower at 138.90 with 10-year yields a basis point higher at 1.89 percent. "Bunds have remained anchored which is a bit strange but I suspect we'll discover in the next few days why they have not come off," a second trader said. "Perhaps we'll get some headlines reminding us that things are not so good in Greece as they would like us to believe." Italy sold three billion euros of zero coupon bonds and 1.5 billion euros of inflation-linked paper. Reinvestment ahead of coupon and redemption payments totalling 41 billion euros next week supported the sale and is expected to help Italy sell up to 6.25 billion euros of fixed-rate bonds on Tuesday. Italian 10-year bond yields were 9 basis points lower at 5.46 percent but the rally in peripheral spreads spurred by December's injection of almost half a trillion euros of three-year bank funding by the ECB has struggled to maintain momentum in February. Even with a take-up similar to the first operation expected at a second three-year refi on Wednesday, according to a Reuters poll, it is unclear how much more traction the periphery can get. "Yields on shorter-dated (Italian) paper are not half as attractive as they were at the start of the year," said Nicholas Spiro, managing director at Spiro Sovereign Strategy. "There's still insufficient demand, particularly from foreign buyers, for longer-dated bonds given the increased risks. The Treasury is likely to find March and April a lot more challenging than January and February."

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