* Portugal's worries about BES group have regional reverberations
* Greek three-year debt sale sees lacklustre demand
* Irish, Spanish sales go smoothly as markets differentiate (Adds final details of Greek bond sale, fresh comments)
By Marius Zaharia
LONDON, July 10 (Reuters) - Concern about the health of a parent company of Portugal's largest bank hurt bonds from the euro zone's periphery on Thursday, curbing demand at Greece's second debt sale following its 2012 default.
It was the first significant episode of contagion for peripheral markets in 2014. Debt yields in those markets reached record lows in the first half of the year, helped by ultra-easy European Central Bank policies that let countries sell debt easily regardless of their ratings or economic situation.
Espirito Santo Financial Group, the largest shareholder in Portugal's Banco Espirito Santo, said on Thursday it had decided to suspend its shares and bonds, citing "material difficulties" at its parent company, ESI.
Sources told Reuters on Wednesday the Espirito Santo group is considering debt-for-equity swaps and may ask for more time to repay debts, as it grapples with the financial problems.
The government in Lisbon has repeatedly said that BES is isolated from the holding company's problems and there is no risk to public finances. However, the turmoil has led to a sharp sell-off in Portuguese government bonds and had repercussions for other markets as well.
Greece's sale of three-year bonds drew mediocre demand compared with recent offerings from euro zone peripheral issuers. Athens raised 1.5 billion euros, well below the 2.5 billion to 3 billion euros it was widely expected to achieve.
Total bids were only 3 billion euros. That looked lacklustre to many market players who are used to seeing order books several times that size at a peripheral euro zone debt sale.
Guido Barthels, chief investment officer at Luxembourg-based Ethenea, was initially interested in the sale but was put off by what was happening in Portugal.
"It is not a good day to come to the market for Greece," Barthels said. "Given what's happening in Portugal, it does not make a whole lot of sense to touch that."
Yields on Portuguese 10-year bonds rose by as much 21 basis points to 4.01 percent, dragging their peripheral peers with them. Greek yields were 17 bps higher at 6.28 percent. Spanish and Italian yields rose 6 bps to 2.82 and 2.94 percent, respectively.
The bond was sold at a yield of 3.50 percent, the lower end of a 3.50-3.625 percent price guidance. That is higher than those offered by all 10-year euro zone bonds apart from Portugal's.