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UPDATE 2-Greece's 10-year government bond yield tumbles to eight-year low

* Greece's 10-year yields hit an eight-year low at 4.802 pct

* Analysts say Greece could return to market at these levels

* U.S. tensions push German borrowing costs close to 3-month lows

* Most high-grade euro zone yields lower 1-2 bps (Writes through)

LONDON, Dec 6 (Reuters) - Greek 10-year government bond yields hit an eight-year low below 5 percent on Wednesday, as investors were encouraged by upbeat economic data and a deal struck between Greece and its lenders. Greece and its euro zone creditors reached a preliminary agreement on Saturday on reforms Athens needs to roll out under its bailout program, a move that could pave the way for the country to leave the aid plan in August.

"Broadly, things are settling down for Greece and there is a sense that the worst of the crisis is over," said Matthew Cairns, a rates strategist at Rabobank in London.

"At the same time the market is hunting for yield and looking at the periphery."

The yield on Greece's 10-year government bond dropped to 4.802 percent on Wednesday, the lowest since November 2009.

Analysts said the fall in bond yields could encourage Greece to come back to the market with new bonds.

Most high-grade euro zone bond yields were lower by 1-2 basis points on Wednesday, pushed down by political tension in the United States and a continued flattening of the U.S. Treasury yield curve.

Concerns over progress of a tax reform bill and a U.S. federal investigation into Russian interference in the 2016 presidential election have added to market uncertainty.

Traders said all of this was boosting demand for German bonds, considered one of the safest financial assets in the world, as well as other well-rated euro zone government debt.

DZ Bank strategist René Albrecht said the drop in euro zone yields -- yields move inversely to price -- was due to this "risk-off sentiment" related to U.S. policy uncertainty.

German 10-year bond yields were close to a three-month low in early trade, hitting 0.295 percent, before easing back to 0.31 percent after an auction of its 10-year bonds.

Portugal swapped more than 1 billion euros of bonds expiring in 2019 and 2020 for five- and 10-year paper on Wednesday, extending the maturity of its debt profile.

ECB board member Yves Mersch said on Wednesday that the European Central Bank should start planning the end of its bond-buying program since the economic recovery will make such stimulus unnecessary.

Later on Wednesday, ADP figures that detail U.S labor market data will give an indication of employment trends in the world's biggest economy, ahead of the U.S Federal Reserve policy meeting next week when it is largely expected to hike rates.

(Reporting by Fanny Potkin and Dhara Ranasinghe; Editing by Catherine Evans)