UPDATE 1-Greek stocks rise, yields fall on hopes for business-friendly new government

Greek stocks rallied more than 6% and government bond yields fell sharply on Monday after the country's ruling leftist Syriza party suffered a massive defeat in the European elections, forcing Prime Minister Alexis Tsipras to call a snap election.

Tsipras was left struggling for his political survival after his party lost its first major vote in years to the opposition conservative New Democracy party, which is considered more business-friendly and pro-European than Syriza. "Syriza was starting to spread some gifts ahead of the elections and investors were starting to worry about Greece not achieving the primary surplus they need," DZ Bank analyst Rene Albrecht said, referring to measures such as bonuses for pensioners and a cut in sales tax.

"Now markets are hoping for a more conservative party who will be more disciplined on spending." The main stock index was up 6.4% and set for its biggest one-day gain in more than three years at 1210 GMT, far outperforming the broader market. The euro zone STOXXE was up 0.4%.

Greek government bond yields dropped sharply, with the 10-year yield briefly hitting 3% for the first time. The move eased as the session wore on, but it was still down 24 basis points at 3.16% and set for its biggest daily drop since December 2017.

Monday's gains across equities has extended Athens' stellar rally so far this year as investors have bet on the country's economic revival pushing prices higher. The index is the best performing market in Europe. (Reporting by Josephine Mason and Abhinav Ramnarayan; Editing by Alison Williams)