UPDATE 3-Greece gets heavy demand for 10-year bond

* Bond draws 16 billion euros of demand - banking source

* Great majority of bonds allocated to real money investors

* No more than 10 percent of bonds placed within Greece

* Debt chief aims to near Ireland's spread levels

(updates with book closing)

By Alex Chambers and George Georgiopoulos

LONDON/ATHENS, March 4 (Reuters) - Greece attracted heavy demand for a sale of 10-year euro benchmark bonds on Thursday, passing a test of market confidence in its fiscal reforms, although it had to offer a high yield on the issue.

Petros Christodoulou, head of Greece's PDMA debt agency, told Reuters that Athens now planned to tap the debt market on a regular basis.

"Greece is back in the market," he said. [ID:nATH005264]

A banking source familiar with the deal said the bonds drew about 16 billion euros ($22 billion) of demand, and that the final pricing indication was mid-swaps plus 300 basis points, tighter than the initial pricing indication of 310 bps.

But Christodoulou said Athens would only issue 5.0 billion euros of the bonds as they were so expensive. Official pricing and issuance details were expected to be announced later.

The great majority of the bonds would be allocated to "real money accounts", or investors who wanted the debt for investment rather than for short-term trading or speculation, he said.

Greece has blamed hedge funds and other speculators for worsening its debt crisis by pushing yields on its debt up sharply in the past several months.

Christodoulou also said no more than 10 percent of the bond deal was placed within Greece, another sign that foreign investors remained willing to buy Greek debt at high yields.

On Wednesday, the government announced 4.8 billion euros of austerity steps for 2010 in an effort to shrink its budget deficit; the bond sale was an initial test of whether investors believed the steps could prove effective. [ID:nLDE6220NA]

SPREADS

The spread of the 10-year Greek government bond yield over the German Bund yield widened only moderately to 298 bps from 290 bps on Thursday, suggesting the market was confident of absorbing the new supply of debt.

The spread has narrowed sharply from as high as 370 bps last week, in anticipation of the austerity measures and in the hope that rich European Union governments might ultimately extend some form of financial aid to Greece to ease its debt crisis.

Greek bank stocks <.FTATBNK> rose over 2 percent at one stage on Thursday, although they later pulled back to stand only 0.6 percent higher.

"The bond sale suggests that the government is able to tap bond markets," said Costas Manolopoulos, a bank analyst at IBG. "This could lead to lower bond spreads, which would be good news for banks' profitability."

Marc Ostwald, analyst at Monument Securities, noted that Greece was still paying a very high price to raise money, but he said the strong demand for the bonds was good news for the sovereign debt of other countries that the market views as risky, including Argentina, Venezuela and Ukraine.

It was Greece's second bond issue in the euro zone debt market this year. In late January it raised 8 billion euros with a sale of five-year benchmark bonds, paying a hefty premium of 350 bps over mid-swaps and receiving massive investor orders of about 25 billion euros.

MORE BONDS

Further Greek bond issues are expected to follow in coming months. Greece needs to refinance about 20 billion euros of debt maturing in April and May, and officials previously said its funding needs were met until mid-March.

Some of the new bonds could be denominated in currencies other than the euro, such as the dollar; Athens has said it will stage a roadshow for investors in East Asia and the United States this year, but has not set a firm date.

Christodoulou said that as Greece regained credibility among investors, it aimed to become able to issue bonds "at levels not far wider than Ireland", though he did not give a timeframe.

The 10-year yield for bonds issued by Ireland, which is also heavily indebted but is seen by the market as very effective in tackling its budget deficit, was at a spread of 133 bps over Bunds on Thursday.

For Greece to near that level, it might require an upgrade by credit rating agencies, which have indicated Greece could still face a downgrade over the next year if it does not carry out its austerity plan effectively. [ID:nLDE62317P]

Thursday's bond was mandated to Barcap, HSBC, Nomura, NBG and Piraeus Bank. (Editing by Andrew Torchia) (andrew.torchia@thomsonreuters.com; +44 (0) 207 542 9782))