* Risk of Spanish sovereign bailout grows
* Greek funding worries add to peripheral pressure
* Bund yields set to mark new lows on safe-haven flows
By Kirsten Donovan
LONDON, July 23 (Reuters) - Spanish bond yields marched relentlessly higher on Monday on fears the government will lose access to debt markets and need a full sovereign bailout as its regions began lining up for financial assistance.
Concerns also mounted again over Greece with international lenders scheduled to gather in Athens to discuss the terms of further rescue payments, after its prime minister said the country was now mired in a "Great Depression"..
As risk aversion dominated financial markets, 10-year German government bond yields were set to break their all-time lows and U.S. T-note yields hit their lowest since the early 1800s in Asian trading.
The Spanish region of Murcia moved closer to following Valencia in seeking financial aid from the government, which set up an 18 billion euro fund earlier this year to help the regions refinance their debt. Media reported half a dozen other regions were ready to do likewise..
"Given the market reaction on the back of the news that more and more regions are looking to tap in to the liquidity fund..., it will be very difficult for Spain to circumvent further support for itself," said Norbert Aul, a rate strategist at RBC Capital Markets.
The news overshadowed approval of a bailout for Spain's banking sector, worth up to 100 billion euros, agreed on Friday, which along with fresh austerity measures and looser fiscal targets was aimed at avoiding a full bailout that the euro zone can barely afford.
But Spanish bond prices were in free-fall in illiquid markets, reflecting worries that the banking bailout alone was unlikely to be enough.
Ten-year yields, which rise as prices fall, were up over 30 basis points at 7.59 percent and two-year yields were up almost 90 bps at 6.64 percent
The recent flattening of the curve, as short-dated yields rise more than longer-dated ones, illustrates a perceived rise in credit risk.
Spain must make coupon and redemption payments to bondholders totalling 20 billion euros next Monday, followed by nearly 25 billion euros in October, according to Reuters data.
Looking further out, 60 billion euros worth of paper is due for repayment next year, with a similar amount due in 2014.
RBC's Aul said Spanish auctions would become very difficult at current yield levels and that as soon as primary market access was at stake the likelihood the country would have to ask for support in some form would increase significantly.
"The first focus should be on any measures by the (euro zone rescue funds) that offer primary market support, as it is not feasible to take a sovereign of the likes of Spain completely off the primary market as was the case for Ireland, Portugal and Greece."
BUND YIELDS TESTING LOWS
Pulled down with Spain's, 10-year Italian bond yields were up 20 bps at 6.42 percent, rising above the Irish equivalent for the first time since January 2009.
While the euro zone's bailout funds could scrape together enough cash to rescue Spain, analysts say there are not currently enough funds to also support Italy.
Meanwhile, German news magazine "Der Spiegel" reported on Sunday, citing high-ranking representatives in Brussels, that the IMF may not take part in any additional financing for Greece.
"It's not looking good for Greece, it's hard to see how they can stay in the euro and then there's Spain," a trader said.
"Core yields are at or near multi-year lows and the periphery is going to stay under pressure. Italy will get dragged down with the rest of them."
September Bund futures were 32 ticks higher at 146.09, nearing June's 146.89 record high after closing above a key resistance level on Friday. Ten-year yields were within a basis point of their 1.127 percent record lows.
Two-year German bond yields sank deeper into negative territory and were last at minus 7.5 basis points.
If the risk-off sentiment persists, investors will forego any returns at a two-year Dutch bond sale on Tuesday, effectively paying to lend to the country.
Longer-dated German bonds are likely to underperform heading into a sale of 2044 bonds on Wednesday, steepening the 10/30s yield curve.
