* Euro up 0.9 percent, Greek bond yield spread narrows
* Central bankers doubt Athens will need hard cash
* Germany reluctant to fund deal
* ECB policymaker opposes IMF role
* IMF "following developments closely"
(Adds IMF comment)
By Timothy Heritage
BRUSSELS, March 26 (Reuters) - Euro zone leaders won muted approval from financial markets on Friday for a "band aid" agreement to create a safety net for debt-ridden Greece, but a row over the IMF's role flared up just as it had seemed settled.
Central bankers played down the likelihood that Athens, which is struggling to cut a giant budget deficit, would ever need hard cash from European governments and the International Monetary Fund to avoid defaulting on its debt.
But the day after the leaders hammered out their deal in Brussels, the plan remained short on details and the IMF made no direct comment on its role, which Berlin had demanded due to public hostility in Germany to bailing out Athens.
Portugal's Vitor Constancio, a European Central Bank policymaker and widely expected to be confirmed as its new vice-president, said he remained against the Fund's involvement.
"The imminent risk of default has been lowered as a result of the support plan," said Charles Diebel, strategist at Nomura. But he added that the aid was not a quick fix for Greece's fiscal problems, it has "only put a band-aid on it".
Greece, which must borrow some 16 billion euros between April 20 and May 23 alone to refinance maturing debt, declared markets were ditching fears that Athens would fail to honour its debt repayments, and the euro rose against the dollar.
"The market is quickly pricing out any probability of default risk," Petros Christodoulou, the head of Greece's debt agency, told Reuters.
Under Thursday's accord, Athens would get get coordinated bilateral loans from other countries that use the euro and the IMF only if it faced severe difficulties.
In Washington, the IMF made no detailed comment on the plan. "We are following developments closely," it said in a brief statement. "As we have said earlier, the Fund always stands ready to consider a request from a member country for our financial assistance."
Greece's central bank chief said Athens was unlikely to make use of the aid facility as budget cuts which the government has taken would soon yield results.
"The solution that was chosen seems to be a workable one which I think will not be used by Greece, because measures that have been announced will start to bear fruit soon," Bank of Greece Governor George Provopoulos told reporters.
European Central Bank Jean-Claude Trichet, expressing a widely-held hope that investors will gradually regain confidence in Greek government debt, also said on Thursday that the mechanism would probably not be used.
But this fed market scepticism. "It looks like we have a fund which Greece doesn't want to use and Germany doesn't want to pay for," said Citigroup economist Juergen Michels.
Nevertheless, Trichet won praise in Athens when he effectively announced on Thursday that the ECB would continue to accept Greek bonds as collateral for cash loans, even if the government's debt rating was cut.
IMF ROLE
A statement by euro zone leaders included no numbers on the deal, but a senior European Commission source said the support package would be worth 20-22 billion euros ($27-29 billion) if required in an emergency.
French President Nicolas Sarkozy said the euro zone would put up two-thirds of the money, and the IMF the rest.
However, the IMF's participation remained contested.
Constancio made clear he didn't like any suggestion of IMF involvement in a euro zone family problem. "As I said during my hearings in European parliament, I think the IMF is not necessary and should not have a role," he told reporters.
Constancio has been nominated as ECB vice-president and was backed by the European parliament on Thursday.
Trichet has had similar misgivings, although he welcomed the deal after it was struck.
Injecting further uncertainty, a major German state bank said it was still waiting for the Berlin government to decide whether it should buy any Greek government bonds.
AUSTERITY MEASURES
Market reaction was mixed. The yield on the 10-year Greek government bond fell as low as 6.21 percent, well off this week's peak of 6.67 percent.
The spread over benchmark German Bunds slipped to 306 basis points, the tightest in more than a week.
But that still means Greece would have to pay roughly double the interest rate on any new bonds it sells than Germany would, a burden that Athens can ill-afford as it fights to cut its budget deficit with unpopular austerity measures.
The euro rose 0.9 percent against the dollar from a 10-month low, helped by the chance that Athens would not need aid. On Thursday it had fallen as investors believed IMF involvement showed the euro zone could not handle its problems alone.
German Chancellor Angela Merkel German Chancellor welcomed the small fall in Greek debt yields. But she made clear that far more work needed to be done, saying that it would be difficult to avoid changes to the European Union treaty if the bloc wanted to learn from the Greek crisis.
Merkel had long resisted offered aid to Greece because of public opposition in Germany and concerns that any deal could face a legal challenge at home. She also faces a tough state election in May that she can ill afford to lose.