(Updates prices, detail on Greek PM letter, analyst comments)
By Emelia Sithole-Matarise
LONDON, July 1 (Reuters) - Yields on bonds issued by Europe's southern states fell on Wednesday as investors continued to lay cautious bets on a deal to keep Greece inside the euro zone, hours after it became the first developed economy to default on an IMF loan.
The moves accelerated after reports that Prime Minister Alexis Tsipras sent a letter to Greece's lenders accepting a deal that creditors have offered with some changes. Euro zone officials said the letter contained conditions that at least some governments would find hard to accept, tempering the market rally.
Euro zone finance ministers are due to confer later on Wednesday over Tsipras' earlier request for a new two-year aid deal to pay nearly 30 billion euros of debts.
A euro zone official said on Wednesday a new bailout deal could be agreed in time for the country to meet a July 20 deadline for the repayment of 3.5 billion euros of bonds to the European Central Bank.
France said it would keep pushing for a deal before a Greek referendum on Sunday, hours before the ministers' second conference call on the crisis in two days. Greece's EU partners say the outcome of the plebiscite will determine whether it stays in the euro.
Italian and Spanish 10-year bond yields were 5 basis points down at 2.26 percent and 2.24 percent , respectively. Portuguese equivalents were 8 bps lower at 2.90 percent.
"Buyers are quite myopic in the sense that every bit of encouraging or positive news on Greece is leading to a rally and counterproductive newsflow is just being ignored and we've seen that in the last week," said Commerzbank strategist Michael Leister.
"If you read carefully the letter Tsipras sent he is not really giving in to all the creditor demands, there're amendments ... But we think that at this stage as long as this hope for compromise remains alive (peripheral euro zone yield) spreads are more biased to tightening."
BAD TIMING FOR GERMAN DEBT SALE
Investors' improved appetite for riskier assets undermined demand at a German sale of 5-year bonds, resulting in a technically uncovered auction.
German 10-year yields, the benchmark for euro zone borrowing costs, rose 3 basis points to 0.81 percent, bouncing off the day's low of 0.76 percent.
Focus was also on how opinion polls are shaping up ahead of Sunday's referendum. A poll by the ProRata institute published in the Efimerida ton Syntakton newspaper showed 54 percent of those planning to vote would oppose EU-prescribed bailout terms against 33 percent in favour.