* Greece draws over 11 bln euros of orders for new bond
* Italy services sector activity returns to growth
* Euro zone PMI beats forecasts, points to expansion (Updates prices, adds Greek bond-deal details)
By Virginia Furness
LONDON, March 5 (Reuters) - Italian government bond yields fell across the curve on Tuesday as firming services activity in Italy and the broader euro zone boosted hopes that an economic downturn may be abating.
Greece was also in the spotlight after selling its first 10-year bond since plunging into a debt crisis nine years ago.
Data showed Italy’s services sector expanded slightly in February after contracting the month before, although new business orders fell into negative territory for the first time in four years.
“The Italian services PMI was better than expected, psychologically it was above the 50 mark that suggests expansion rather than contraction,” said Mizuho rates strategist Antoine Bouvet. “Though it should be remembered it is only a minor margin above 50.”
A Reuters headline that the 5-Star Movement could quit the government may also be contributing to the rally, he added.
“The assumption in the market is that because the 5-Star movement’s popularity has been declining, it would be replaced by a more market friendly, less fiscally profligate government,” he said.
Ten-year Italian bond yields fell to a one-month low of 2.693 percent. Two-year yields fell as much as five basis points to 0.30 percent.
Italian fourth quarter gross domestic product data showed the country’s economy shrank by 0.1 percent, better than a preliminary estimate of a 0.2 percent contraction.
Italy’s services data added to a set of more positive readings across Europe. Activity in Spain’s services sector beat expectations as new orders rebounded, despite being slightly down overall.
This contributed to an acceleration in overall business activity in the bloc, though again this remained lacklustre.
The data comes ahead of the European Central Bank meeting on Thursday at which analysts are expecting guidance on its plans for fresh multi-year loans to banks.
“In the euro zone you have two very different stories, a manufacturing/industrial story where things are not really picking up and it’s still below 50 in most countries,” said Charles St Arnaud, senior investment strategist at Lombard Odier Investment Management. “But the service sector remains resilient and given that’s the most important part of the economy it gives me some comfort.”
The services activity data helped peripheral euro zone bond yields fall, while pushing up yields on the bloc’s safe haven debt. Spanish and Portuguese 10-year government bond yields were both down around two basis points.,
German 10-year bond yields rose one bp to 0.17 percent, while its two-year yields rose to a one-year high of minus 0.495 percent,.
Greece drew strong demand for its new 10-year bond issue, a clear endorsement by markets of its economic revival days after securing a two-notch ratings upgrade by Moody’s on Friday.
It raised 2.5 billion euros from a sale that drew offers worth 11.8 billion euros.
Greek 10-year bond yields were flat in late trade at 3.69 percent, giving up earlier rises. (Reporting by Virginia Furness and Abhinav Ramnarayan; additional reporting by Dhara Ranasinghe, editing by Peter Graff)