Spain's short-term borrowing costs jumped on Tuesday as euro zone markets returned from the Easter break still fretting about a potential Greek debt restructuring with knock-on effects on other sovereigns.

France meanwhile became the first euro zone state publicly to endorse the candidacy of Bank of Italy governor Mario Draghi to succeed Jean-Claude Trichet as president of the European Central Bank later this year.

French President Nicolas Sarkozy's statement, at a joint news conference with Italian Prime Minister Silvio Berlusconi, raised pressure on euro zone powerhouse Germany to accept Draghi after its own candidate, Axel Weber, dropped out in February.

The Spanish Treasury sold 1.97 billion euros of short-term bills with the average 3-month yield jumping to 1.371 percent compared to 0.899 percent in March, and 6-months rates to 1.867 percent from 1.361 percent last month.

Investors continued to shun Greek debt over mounting concern that the country will have to restructure its debt, which official European Union data showed on Tuesday had rocketed to 142.8 percent of gross domestic product in 2010.

The premium investors demand to hold Greek government bonds rather than benchmark German Bunds rose to a euro era high above 12 percentage points and the cost of insuring Greek debt against default rose sharply.

The Greek government said it would take all necessary measures to meet its fiscal targets under an EU/IMF bailout program after last year's public deficit was revised upwards to 10.5 percent of GDP.

Athens blamed the deviation from the original 8 percent target, and the most recent forecast of 9.6 percent, on a deeper than anticipated recession which hit tax revenue and social security contributions.

The fact that the Greek deficit ratio for 2010 is now also in double-digit territory should further fuel the debate about Greek sovereign debt restructuring, said Ralph Solveen, economist at Commerzbank.

The ECB under Trichet is fiercely opposed to any restructuring.

While the Spanish auctions were heavily oversubscribed, they offered scant evidence that Madrid has succeeded in decoupling itself from the debt woes of weaker euro zone partners Greece, Italy and Portugal.

Although these yield levels are perhaps still currently more cause for concern rather than outright alarm, there is little scope for further such increases in short-dated funding costs before the market begins to get spooked over the prospect of Spanish contagion, said Rabobank rate strategist Richard McGuire.

SPAIN CONCERNS LINGER

The official European Union figures for 2010 showed most member states began to reduce budget deficits swollen by the financial crisis through austerity measures last year, but public debt levels swelled almost everywhere.

Spain's debt remained relatively low at 60.1 percent of GDP, more than 20 percentage points less than core euro economies Germany and France.

However, market concerns about Spanish public finances focus on the cost of recapitalizing regional savings banks and coping with the impact of a real estate crash which experts say still has further to run.

Despite official denials from Athens and Brussels, two Greek newspapers said on Friday that the government was considering extending maturities on its debt to make it sustainable.

Top-selling daily Ta Nea spoke of a velvet restructuring that would include extending outstanding debt and a voluntary agreement with lenders to modify the repayment terms.

Talks between Portugal, the latest euro zone government to request a financial rescue, and officials from the European Commission, the European Central Bank and the International Monetary Fund continued over the Easter weekend, officials said.

Both sides are racing to conclude an agreement on conditions for an expected 80 billion euro bailout in time for an EU finance ministers' meeting on May 16, so it can be sealed before a snap Portuguese general election on June 5.

Spain has implemented public spending and wage cuts, raised its retirement age and begun to liberalize its labor market in response to warnings of an unsustainable public deficit and an economic model over-reliant on a near-defunct property sector.

(Additional reporting by Emmanuel Jarry and James Mackenzie in Rome, Jan Strupczewski in Brussels and George Georgiopoulos in Athens; writing by Paul Taylor; editing by Mike Peacock)