While international investors fretted about Greece's debt negotiations, domestic buyers helped banks such as National Bank of Greece and Piraeus Bank more than double their share prices in six weeks.

Investors initially worried that government plans to recapitalize the banks would involve issuing common voting shares, which would give the state effective control.

But plans confirmed by the government now envisage recapitalization via common shares with restricted voting rights or convertible bonds that would leave the banks in private hands.

The Athens General index - which shed more than 50 percent in four months to hit an all-time closing low on January 10 - has since soared almost 35 percent, outpacing the rise in the euro zone blue-chip Euro Stoxx 50 index by roughly four times.

The Athens index remains at half its 2011 peak and the banking sector just a third of its highs of last year.

The rise in the highly-weighted Greek banks has been in hefty volume, with overall bourse turnover at historically high levels, boosted by local investors, who accounted for more than 90 percent of all shares bought in Athens in January, stock exchange data showed.

"This is a completely different story to Europe: we're playing a scenario where banks won't be nationalized for the moment," said Manos Chatzidakis, head of equity analysis at Beta Securities in Athens.

Major European bourses started rallying in late November after the European Central Bank injected cash into the banking system, helping lower borrowing costs for debt-laden Italy and Spain and boosting investor appetite for risky assets such as stocks.

Greece, however, faced the prospect of a disorderly default if it failed to secure a second bailout from the European Union and International Monetary Fund, as well as a debt swap deal with private creditors.

While euro zone finance ministers were expected to approve the bailout package later on Monday, the threat of default and a deepening recession exacerbated by austerity measures have weighed on non-financial stocks in Athens.

Shares in Coca-Cola's bottling business have risen by a relatively modest 12 percent in Athens since the start of the year, while state-owned Hellenic Petroleum is down around 2.7 percent.

Banks though made a U-turn in mid-January, when the specter of nationalization began to lift. Five lenders account for nearly a quarter of the weighting of the Athens index, whose entire market cap is comparable to that of a single euro zone blue-chip, such as steel maker Arcelor Mittal.

"Most of the volumes are in the banking sector and its weighting is high, so that's why the index rallied," Natasha Roumantzi, head of analysis at Piraeus Securities in Athens, said.

She said one reason domestic investors were piling into banks was to support valuations ahead of the planned injections of public money later this year.

The higher the share price, the lower the number of new shares that each bank will need to issue in exchange for state capital - resulting in a more limited stock dilution for existing shareholders.

Some in markets were skeptical the rally could be sustained, arguing higher valuations and worsening economic conditions were paving the way for profit taking.

The share price to book value ratios of National Bank of Greece and Piraeus Bank more than doubled since mid-January to 0.31 and 0.15, respectively, Thomson Reuters Datastream data showed. Spain's Santander, for example, stands at 0.75.

While they remain low in historical terms and compared to euro zone peers, the two banks' books are set to suffer from a growing number of bad loans as Greece's economy deteriorates.

"The current valuations for Greek banks are not sustainable if you add the money that will be injected," the head of institutional equity sales at a Greek bank said.

"Then there's the recession and the problems implementing the reforms: it's not going to be a rosy picture."

(Additional reporting by Angeliki Koutantou, George Georgiopoulos and Harry Papachristou in Athens; data by Scott Barber and Vincent Flasseur; editing by Nigel Stephenson)

By Francesco Canepa