* Prime money funds resumed buying of euro zonedebt
* Fund buying centered on French, German bank paper
* Euro zone debt flare-up slows funds' re-entry to region
* Regulation, Moody's downgrade also concerns for funds
NEW YORK, May 9 (Reuters) - U.S. prime money market funds raised their holdings of euro zone bank debt in April, resuming their return to this sector this year after scaling back exposure in March, a report from J.P Morgan Securities released on Wednesday showed.
Prime money market funds increased their euro zone debt holdings by $14 billion in April.
This raised their total exposure to euro zone banks to $205 billion, up $52 billion since the beginning of the year, according to J.P. Morgan's latest monthly analysis of prime money funds' holdings.
Unlike Treasuries-only money market funds, prime money funds may invest in riskier short-term bank debt in an attempt to obtain higher yields.
"It's been a slow correction from the major flow last year," said Alex Roever, short-term fixed income strategist at J.P. Morgan in New York.
He said the amount of euro zone bank debt that prime money funds held in April was still $316 billion, or 62 percent, below the level seen a year earlier.
The bulk of the move back into euro zone bank investments so far this year has been among several large money fund operators buying the short-term debt of the largest French and German banks, Roever said.
For example, prime funds nearly doubled their holdings of unsecured commercial paper and certificates of deposits issued by French banks by $12 billion to $26 billion in April. But they trimmed their positions French bank time deposits, floaters and other securities.
Outside the 17-member euro zone block, prime funds reduced their holdings of British and non-euro zone European bank paper by $20 billion to $253 billion last month, J.P. Morgan said.
SLOW RECOVERY
Worries about the euro zone debt crisis intensified after national elections in Greece and France this past week.
Greek political leaders have struggled to cobble together a new coalition government with some calling for renouncing the austerity measures needed for a much needed 130 billion euro bailout.
Investors also fear that French president-elect Francois Hollande might clash with German Chancellor Angela Merkel on how to solve the euro zone's debt malaise. During his campaign, Hollande called for a shift in focus toward growth rather than budget cuts as key to solve the debt crisis.
Heightened concerns about political turmoil hampering efforts to contain the debt crisis have roiled global stock markets and spurred buying in bonds and other safe-haven assets. They have not affected much the funding for euro zone banks and prime money funds' holdings in euro zone paper, Roever said.
In addition to persistent concerns about Europe's debt problem, prime funds' slow move back into euro zone debt stemmed from heavy redemption in recent weeks on worries about further regulatory overhaul of the U.S. money fund industry and ahead of likely downgrades from Moody's Investor Service of European banks and global financial institutions.
Prime money fund assets totaled $1.003 trillion at the end of April, little changed from March but $26 billion less than the end of 2011.
Prime funds comprise roughly 40 percent of the U.S. money fund industry.
Overall U.S. money fund assets rose $15.95 billion to $2.550 trillion in the week ended May 8, data firm iMoneyNet said on Wednesday.
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