Markets saluted a euro zone deal on a huge standby rescue package for Greece, slashing the debt-laden country's borrowing costs and buying its stocks and bonds on Monday as fears of a near-term default evaporated.

But awkward questions remained over whether Greece would use the bailout fund, how it would be activated, and how the weakest of the single European currency's 16 members would cope with its 300 billion euro debt mountain in the longer term.

The euro rose, the yield on short-dated Greek bonds fell by over a point to around 5.9 percent and the cost of insuring Greek debt against default narrowed dramatically from Friday's close as the bigger-than-expected rescue plan impressed markets.

It's almost a market that's in disbelief that we've seemingly got a solution to this problem, said Sean Maloney, a rate strategist at Nomura.

But a German government spokesman raised a new hitch by saying a special summit of euro zone leaders would be needed to activate the aid mechanism, in which Germany would be the biggest contributor with 8.4 billion euros ($11.4 billion).

That could take days rather than hours to arrange and contradicted statements by the head of the Eurogroup of euro zone finance ministers and the European Commission that a decision by the ministers would be sufficient and could be taken by teleconference like Sunday's deal on the rescue plan.

The euro slipped slightly after the German spokesman's comment and the premium investors charge to hold Greek debt rather than German bonds widened to 360 basis points from a session low of 335, though it was still lower on the day.

A European Commission spokesman contradicted him, telling reporters: No. We do not have to organize a big summit here in Brussels. As you saw yesterday, the euro group can activate itself in a very quick, effective... way.

Economists said the euro zone deal would ease short-term worries about Athens' ability to service its debt, and lowered the risk of contagion to other weak economies in the currency area, but left longer-term concerns about Greek public finances.

The support package for Greece ... should ensure that it is able to meet its financing needs over the next year or so, but it does not guarantee Greece's long-term solvency, Ben May of Capital Economics in London said in a note to clients.

Alessandro Profumo, head of Italy's Unicredit , the third biggest bank in the euro zone, told Reuters Insider television: This has been a very important intervention. In my opinion, the contagion risk is dramatically lower today.

YIELDS FALL

The yield on the country's 12-month T-bill plummeted some 268 basis points to 5.28 percent, suggesting the threat of a near-term default had been lifted.

The existence of a detailed standby plan, even if Greece has not decided to invoke it, should help Athens auction a planned 1.2 billion euros in T-bills on Tuesday.

Euro zone finance ministers agreed on Sunday on a 30 billion euro package of three-year loans at interest of about 5 percent, if Greece requests help, with the International Monetary Fund expected to supply a further 15 billion euros in the first year.

The deal, which would be worth 45 billion euros in the first of three years, with more to be negotiated later, could amount to the biggest multilateral financial rescue ever attempted, dwarfing past IMF programs for Mexico and Argentina.

However, Greek policymakers and media were under no illusion that a short-term boost might not be enough to prevent the country having to seek a bailout in the longer run.

It offers a sigh of relief ... but it doesn't solve our problems, the center-left daily Eleftherotypia, which supports Prime Minister George Papandreou, said in an editorial.

The country is heavily indebted and has to lower its debt if it wants to survive in the long term.

Papandreou is implementing tough austerity measures designed to cut the budget deficit by four percentage points to below 9 percent of GDP. But Greece's debt mountain, equivalent to 125 percent of annual economic output, is set to continue rising.

IMF managing-director Dominique Strauss-Kahn told an Austrian magazine the only solution for Greece in the longer-term was a period of deflation, in which wages and prices have to fall to regain competitiveness.

The agreement on a specific, detailed rescue plan with interest rates significantly below last week's market rates represented a political climbdown by Germany, Europe's biggest economy and main paymaster, which had demanded market rates.

Traders had dumped Greek bonds and shares, especially in banks, in a growing market panic last week amid doubts about the availability of a euro zone rescue due to opposition in Germany.

Greece needs to borrow some 11 billion euros by the end of May to refinance maturing debt and interest charges. A finance ministry official said Greece would go ahead with a U.S. road show in late April to promote a dollar-denominated bond.

A successful return to the markets after last week's fright would enable Athens to delay any request for aid at least until after a key German regional election on May 9, seen as a major political test for Chancellor Angela Merkel.

Granting Greece bilateral aid is unpopular with German voters who regard the Greeks as having lived beyond their means for years while Germany has kept finances tight and in order.

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