UPDATE 1-Greek yields fall sharply as aid payment seen likely
* Greek bonds outperform as euro zone ministers meet
* ECB rates promise support euro zone bonds broadly
* Trade seen erratic due to diverging rates policies
LONDON, July 8 (Reuters) - Greek government bond yields fell sharply on Monday, with Athens expected to secure its next bailout aid tranche.
Greek debt outperformed other lower-rated euro zone bonds, whose yields also fell after the European Central Bank's pledge last week to keep interest rates low or even cut them.
But analysts said the market was likely to be choppy for some time due to diverging euro zone and U.S. rate outlooks.
Euro zone finance ministers meet later in the day to decide on further aid to Greece. The country's creditors said the outlook for its bailout programme remained uncertain but EU and Greek officials told Reuters on Sunday Athens was likely to reach a deal with its lenders
"If that is the case Greece does have a fair amount to catch up ... any hint of an agreement is going to be very positive," a trader said.
Another trader expected a "fudge" until after German elections in September.
Ten-year Greek yields fell 31 basis points to 11.10 percent.
Equivalent Portuguese yields were 5 basis points lower at 7.14 percent after the country's coalition partners reached a deal on Friday to end a rift that had threatened its bailout programme.
Ten-year Spanish and Italian yields also fell.
The ECB pledge to keep interest rates low for an "extended" period and perhaps cut them supported bonds.
But investors remain concerned about the possibility that the Federal Reserve will curb monetary stimulus - seen more likely after Friday's stronger-than-expected U.S. jobs data.
Analysts expected the diverging outlooks to keep trade choppy near term. German Bunds were flat at 141.64.
"We are going to live with a lot of volatility in the bond market," ING senior rates strategist Alessandro Giansanti said.
"Every time there will be some positive data on the macro side, it will trigger a sell-off but, on the other hand, investors are still not very comfortable to have outright short (selling) positions in Bunds especially in an environment where there is a possibility for the central bank to go on with expansionary monetary policy."
Against this backdrop, short-dated German bonds outperformed. Two-year yields fell 1.0 bps to 0.11 percent and five-year yields fell 1.8 bps to 0.63 percent. By comparison, 10-year German yields were flat and 30-year yields rose.
"We are sticking to steepening trades on the core yield curves ... with five years outperforming 10-years and 10-years outperforming 30-years," Giansanti said. "That can be a direct consequence of the expectation of the ECB keeping yields lows."