* Eurogroup fails to agree bailout deal

* Greek bond yields rise, bank stocks fall

* IMF needs more realism from euro zone on Greece, official says

* Manchester attacks cap euro zone bond yields

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates prices)

By George Georgiopoulos and Abhinav Ramnarayan

ATHENS/LONDON, May 23 (Reuters) - Greek government bond yields rose sharply and banking stocks fell on Tuesday after euro zone finance ministers failed to agree debt relief for Greece with the International Monetary Fund and did not release new loans to Athens.

Greece had hoped for clarity on more debt relief after legislating reforms, including pension cuts and tax hikes, demanded by its official creditors, but the Eurogroup meeting in Brussels on Monday failed to reach an agreement.

The IMF has pressed the euro zone for more detail on actions it could take, if necessary, to contain Greece’s gross financing needs, based on a May 2016 declaration. But the euro zone is now holding back on making such promises.

On Tuesday, the IMF’s European Department head Poul Thomsen said the Fund needed to see more realistic euro zone assumptions about Greece’s economy and more detail on planned debt relief measures to join a bailout.

The failure to reach a deal followed weeks of optimism that agreement was at hand.

“Given the way negotiations have been progressing in the past, another delay should not come as a surprise - but this time hopes were running high (for a deal) because of the measures passed by Greece,” ING strategist Benjamin Schroeder said.

Greece’s short-dated government bond yields were up 23 basis points at 5.77 percent, while 10-year yields climbed 20 bps to 5.85 percent.

Greek stocks fell, led by banks, but later recovered lost ground. The benchmark stock index, down 2.25 percent at one stage, closed down 0.7 percent. An index of Greek banking stocks tumbled 1.86 percent.

Stocks and bonds had rallied since late April on expectations that the conclusion of a bailout review and a deal on debt would put Greece in position to be included in the European Central Bank’s bond-buying programme.

DEBT OBLIGATIONS

Greek government officials have discussed with banks the possibility of returning to the bond market as early as July to try to meet some of their debt obligations.

“It’s a reaction to false expectations that there would be white smoke, cultivated by the press and the government,” said the treasurer of a Greek bank, declining to be named.

“The solution to Greece’s debt problem cannot hinge on a date but on a long-term contract. The IMF wants specificity on certain parameters to be able to conclude that the country’s debt can be sustainable,” he said.

The head of the Eurogroup of finance ministers, Jeroen Djisselbloem, said ministers hope to reach a deal at the next meeting on June 15.

Greece’s debt burden after restructuring privately held government bonds in 2012 and three bailouts is projected at 319 billion euros this year or 176 percent of its economic output.

Talks on debt relief are based on a promise by the Eurogroup in May 2016 to stretch maturities and grace periods on loans so that Greece’s gross financing needs are below 15 percent of GDP after 2018 for the medium term, and below 20 percent later.

Euro zone lenders may consider replacing more costly IMF loans to Greece with cheaper euro zone credit and transfer profits made from a portfolio of Greek bonds bought by euro zone national central banks back to Athens.

“The solution on debt is a very complex and technical discussion. Without concrete signs of an agreement at a technical level, expectations of a deal at yesterday’s Eurogroup were too optimistic. The market reaction is not extreme,” said Ilias Lekkos, chief economist at Piraeus Bank.

A rise in other euro zone bond yields was capped after a terror attack in the British city of Manchester boosted demand for safe havens, with 10-year Bund yields up just 1 bps in late trade at 0.40 percent. (Editing by David Evans and Ed Osmond)