* Greece receives 30.5 bln euros of demand for 10-year tap * Follows Italy as governments seek funding ahead of ECB * Euro area yields continue to fall as dovish ECB priced in (Adds background, updates prices) June 9 (Reuters) - Southern European governments are taking advantage of a fall in borrowing costs to raise funding ahead of a closely watched European Central Bank meeting, with Greece following Italy in selling debt on Wednesday. Euro zone bond yields have fallen sharply in recent weeks, with dovish commentary from ECB officials leading investors to bet the bank is unlikely to slow its pandemic emergency bond purchases at its policy meeting on Thursday. That has helped countries most vulnerable to a tapering of those purchases to raise funding in the market this week, to strong demand. Greece, the bloc’s most indebted state, received 30.5 billion euros of demand for the re-opening of a 10-year bond on Wednesday that raised 2.5 billion euros, its debt management agency said. That follows a sale by Italy, which raised 10 billion euros from a 10-year syndicated bond on Tuesday, receiving over 67 billion euros of demand. Investors easily absorbed the supply, with euro zone bond yields, which move inversely with prices, keeping at early May lows and continuing to fall on Wednesday as investors positioned ahead of the ECB. Yields fell as part of a broader government bond rally that saw U.S. Treasuries rallying as well. “Market participants are in the camp that (believes) most of what could come out of the ECB is already in prices and therefore it’s a good entry point,” said Benjamin Moulle, head of sovereign, supranational and agency syndicate at Credit Agricole CIB, a lead manager on Italy’s Tuesday sale. European Central Bank policymakers will also hold a three-day retreat in Frankfurt next week, aiming to discuss key issues related to the bank’s strategy review. On Wednesday, Italy’s 10-year yield fell over 5 basis points to 0.81%, pushing the closely watched gap with the benchmark German yield briefly to 105 bps, the lowest since May 5. “We have evidence that a lot of clients were neutral to slightly underweight in BTPs and a lot of them were highly motivated, in particular international accounts, to see a new syndication from Italy coming before the ECB,” Moulle said. Greek yields retraced much of a rise from Tuesday when the deal was first announced. Issuers are also keen to get their deals done before the European Union starts selling bonds to finance its coronavirus recovery fund, most likely starting next week. In auctions, the more common way governments raise debt, Germany raised 1.26 billion euros from the re-opening of a 30-year bond, which saw similar demand to the previous such sale, in contrast to recent German auctions. Portugal raised 1 billion euros from six and 10-year bonds, paying a lower yield than at the previous auction. Germany’s 10-year yield, the benchmark for the bloc, was down 2.5 basis points to -0.25%. Mizuho analysts told clients markets were likely to de-risk on Wednesday ahead of the ECB meeting, supporting longer-dated bonds for the time being. (Reporting by Yoruk Bahceli; Editing by Kirsten Donovan) Our Standards: The Thomson Reuters Trust Principles.