Greek proposal lifts markets, despite German rejection

LONDON (Reuters) - A Greek proposal to extend its bailout and not to undermine agreed fiscal targets lifted European stocks to seven-year highs on Thursday and cut government borrowing costs across the euro zone, even though Germany rejected it.

Despite the German rejection, Greece's wording of a document seen by Reuters appeared to go substantially toward the position taken by euro zone finance ministers in early negotiations. That reassured investors a deal was not far away.

Ten-year bond yields in Spain, Italy and Portugal -- the countries most vulnerable to the Greek crisis -- fell 5-7 basis points to 1.54 percent , 1.56 percent and 2.27 percent , respectively.

They were little changed after a German finance ministry spokesperson said the proposal did not correspond to criteria agreed by the Eurogroup on Monday.

The broader FTSEurofirst 300 index <.FTEU3> was up a touch at 1516.30 after reaching a seven-year high of 1.517.98 points when the Greek proposal was reported and a low of 1,504.03 before that. U.S. stock market futures were steady.

"We should now get a definitive agreement soon," Rabobank rate strategist Lyn Graham Taylor said.

Greece's main stock market index <.ATG> rose 1.1 percent and banking stocks <.FTATBNK> rose 5.8 percent. Greek 10-year bond yields fell 38 basis points to 10.05 percent.

The Greek request for a six-month extension to its euro zone loan agreement came as it was weeks away from running out of cash. Crucially, Greece agreed the extension would be monitored by the EU Commission, European Central Bank and International Monetary Fund -- a retreat by Prime Minister Alexis Tsipras, who had vowed to end cooperation with "troika" inspectors.

The euro held steady, after gaining against the dollar on Wednesday after minutes from the Federal Reserve meeting in January showed Fed officials were concerned about hiking interest rates too soon <0#FF:>. The dollar fell after the minutes but was broadly stable on Thursday.

"The minutes were a bit on the dovish side compared to what the market was looking for, so we saw the dollar coming under some initial pressure as a result of that, but I don't think that changes the bigger picture," said Ian Stannard, head of European FX sales at Morgan Stanley in London.

"While the Fed has the potential to generate some short-term volatility, we think the growth picture is the important thing and that is why we still believe we're in a dollar bullish environment."

Ten-year U.S. T-note yields were flat at 2.07 percent, having fallen after the minutes.

In oil markets, benchmark Brent crude futures for April were down $1.52 at $59.01 a barrel after another big weekly build in U.S. crude inventories and a possible rise in Saudi output.

In Asia, Japanese stocks <.N225> hit 15-year highs.

(Reporting by Marius Zaharia; Editing by Larry King)

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