ECB trims haircut on Greek banks' collateral - Greek central bank source

ATHENS (Reuters) - The European Central Bank has reduced the haircut it applies on bonds submitted by Greek banks as collateral to borrow funds, a Greek central bank official told Reuters on Thursday, in a move to boost their access to liquidity.

"The move was decided late on Wednesday evening after talks between the government, the ECB and Greece's central bank governor," the official said. "It is a supportive move given the pressures in the last two day."

Bank of Greece Governor Yannis Stournaras was in Frankfurt on Wednesday.

The official said the new smaller valuation discount meant that an extra 12 billion euros of liquidity could in theory be tapped by Greek banks.

Banks have led heavy losses on the Athens stock market, which has fallen more than 11 percent in the past two days.

Greek banks have cut their borrowing from the ECB -- by 2.0 billion euros in last month to 42.56 billion euros -- but still depend on its funding for liquidity.

On Wednesday, 10-year Greece's bond yields soared to 7.85 percent, reflecting investor unease about its ability to fund itself if the government follows through on plans to quit an international bailout a year early. Investors also fear a snap election next year that could bring the anti-bailout Syriza party to power.

(Reporting by George Georgiopoulos; Editing by Catherine Evans)