Germany found solid demand for its five-year government bonds on Wednesday, as concerns over Greek efforts to secure further aid boosted appetite for less risky investments despite euro-era low returns.

It sold 3.153 billion euros (2.6 billion pounds) of five-year paper, which carried the lowest coupon in the euro era at 0.75 percent - drawing bids at the auction of 2.8 times the amount on offer for an average yield of 0.9 percent -- also the lowest since the euro was launched.

Renewed concern about whether Greece can reach a deal with private sector investors to accept losses on their bondholdings and avoid an uncontrolled default has been the main driver for the latest flight to safety, analysts said.

It looks like a very strong auction ... The reason is clearly the doubts with regards to Greece, DZ Bank rate strategist Michael Leister said.

It may be a proper instrument for speculating on the debt crisis to worsen further. You buy it now and hope for the situation to get worse and sell it at a profit.

Unease over Italy and Spain's ability to refinance their debt at affordable levels has also resurfaced before the two countries sell bonds later this week and supported the German auction.

The small amount on offer -- the lowest since November 2008, according to Commerzbank -- and redemption payments from triple-A-rated issuers due this week also helped.

German Bund futures reversed the day's losses after the results and were last trading 23 ticks higher at 138.95.

SAFE AND LIQUID

Five-year German yields fell to a record 0.74 percent in late December, led by a rally in short-dated debt as investors shunned risky assets and after unprecedented monetary easing by the European Central Bank.

The ECB cut rates by 25 basis points in both November and December and injected nearly half a trillion euros into the banking sector, depressing short-term rates and forcing investors to seek longer maturities for higher yield.

There's still pretty good demand for high quality paper -- there's still too much liquidity lying around, said Achilleas Georgolopoulos, rate strategist at Lloyds Bank.

We see today that parts of the market are enjoying taking the extra yield coming from the periphery... but then some of them still want the insurance provided by Germany.

Germany sold short-term bills at negative rates earlier this week, with many investors more concerned about preserving their cash rather than the return on their investment.

German economic output data earlier in the day showed the euro zone powerhouse was not insulated from the bloc's problems -- a concern which has led to mixed results at German debt auctions in recent weeks.

But with few other safe alternatives, German fixed income instruments are generally expected to remain in demand.

It's not really the buy-and-hold investors (who bought the paper), but investors who are looking for a safe and liquid place to park their money, DZ Bank's Leister said.

There's a significant risk that the Greece situation will deteriorate further ... and I would not exclude yields hitting record lows again.

(Reporting by the London government bonds desk, editing by Nigel Stephenson)