* Euro up 0.8 percent on EU/IMF safety net offer for Greece
* Broader markets' reaction muted
* Longer-term worries about peripheral economies remain
By Emelia Sithole-Matarise
LONDON, March 26 (Reuters) - A euro zone and IMF safety net extended to debt-laden Greece boosted the euro and commodities on Friday but broader market reaction was muted as longer-term worries about fiscally vulnerable European economies persisted.
The deal offers Athens loans and cash but only as a last resort and can only be disbursed with unanimous euro zone approval.
It did not spell out how Greece's debt burden would be managed in practice and failed to alleviate longer-term worries about Greece and other fiscally vulnerable economies in Europe such as Portugal and Spain.
The premiums investors demand to buy these countries' government debt over euro zone German benchmarks fell modestly in a guarded reaction to the deal.
"The fact that there will be a mechanism in place reduces the risk of the euro zone breaking up," said Johan Javeus, currency strategist at SEB in Stockholm. "But going forward the market will be focusing more on whether Greece will be able to deliver the austerity measures it has promised."
The euro rose as much as 0.9 percent to $1.3402 by 1146 GMT, rallying off a 10-month low versus the dollar as the Greece deal eased immediate pressure on the single currency.
The euro initially weakened on news of the deal as investors took the view that IMF involvement suggested the 16-country euro zone was unable to handle its problems by itself.
But dealers later began to close out some of the bets they had made against the euro, pushing the currency up. Dollar weakness in turn helped lift oil prices toward $81 and boosted gold.
Investors have been concerned about stability in the euro zone on the back of the ongoing Greek troubles and a downgrade this week of Portuguese debt. There has also been renewed market focus on debt woes in Dubai.
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For a graphic on the euro zone crisis see http://graphics.thomsonreuters.com/0210/EUROZONE_REPORT.html
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SHORT-TERM BOOST
Under pressure from the Greek debt crisis, the euro has fallen around 12 percent versus the dollar since early December, when it was trading above $1.51.
The U.S. dollar index, a gauge of the dollar's performance against six other major currencies, slipped 0.5 percent.
"The fact a rescue deal for Greece has been agreed will no doubt give risk sentiment a short-term boost and is partially behind the gains seen this morning (in) gold ... and silver," said James Moore, an analyst at TheBullionDesk.com. "However, issues with Dubai and Portugal this week have been a stark reminder of the huge debt problems facing many of the world economies that will continue to overshadow market risk appetite for many months, and potentially years, to come."
Asian share markets advanced but European shares fell from 18-month highs with analysts saying a correction may be due as equities become fully valued and the risk of higher interest rates intensify.
Greek government bonds outperformed euro zone benchmark Bunds, narrowing the gap between their yields by 12 basis points on the day to 309 bps. The cost of protecting against a Greek government debt default also fell.
Waning demand this week at auctions of U.S. Treasuries were also adding to worries about government bonds.
The benchmark yield on the 10-year U.S. Treasury note hit a nine-month high on Thursday and it has gained 17 basis points on the week after a series of poor debt auctions. The yield was down two basis points from late Thursday in New York, at 3.86 percent by 1200 GMT.
Oil hovered around $81 a barrel but gains were limited by worries global recovery could still falter and keep crude demand weak.