Australia shares hit highest in 3 weeks on Greek deal hopes

* Greek proposals raise hope of deal

* Banks rebounding, high dividend paying stocks also gain

* Stocks highest since June 2 (Adds analysis, quotes, stocks on the move)

SYDNEY/WELLINGTON, June 23 (Reuters) - Australian shares rose to their highest level in three weeks on Tuesday as investors bet that Greece's latest budget proposals would stave off a debt default and lead to a deal with lenders this week.

Banks surged on hopes that the potential crisis that has been hovering over Europe's banking system for months will be averted, while stocks promising attractive dividend yields also gained on expectations of improving economic conditions.

On Monday, Greece buckled to pressure and proposed some higher taxes and steps to curtail early retirement among other things, concessions the European Council said were "a positive step forward".

In step with sharemarket gains across Asia, the S&P/ASX 200 index rose 1.3 percent or 69.9 points to 5680.1 by 0213 GMT, its highest intraday level since June 2. The benchmark has lost more than 5 percent since reaching its 2015 peak on March 3.

"When you do get some easing of concerns, such as with Greece, it's the yield plays they come for first," said Argonaut executive director of corporate stockbroking James McGlew, referring to bank stocks.

"There's still a massive volume of money out there that continually needs to find a home and when you look at the way the banks were sold off in the last two months, they've been pretty aggressively bought."

No. 1 lender Commonwealth Bank of Australia (Other OTC: CBAUF - news) led the sector higher, up 1.9 percent, while the rest of the so-called "big four" banks, Westpac Banking Corp, Australia and New Zealand Banking Group and National Australia Bank were all up more than 1.5 percent.

Telecommunications heavyweight Telstra Corp also benefited from the rush to yield stocks, rising 1.3 percent.

Miners rose less than the broader market following declines in key metals prices overnight. BHP Billiton (NYSE: BBL - news) was up 1.1 percent while rival Rio Tinto (LSE: RIO.L - news) added 0.8 percent.

New Zealand's benchmark NZ50 share index was flat at 5,771.94 in early trade, as gains in utilities and healthcare stocks were offset by losses in telecommunications-related shares.

Contact Energy (NZSE: CEN.NZ - news) rose nearly 1 percent amid speculation that Origin Energy may offload its stake in the company, while Mighty River Power and Meridian Energy each climbed around 0.5 percent.

Fisher and Paykel Healthcare rose 0.7 percent as the appliance maker which exports heavily to the United States and other countries was seen benefitting from an ongoing slide in the New Zealand dollar.

Specialised milk processor a2 Milk Company rose 4.6 percent after confirming it received a takeover approach by Australia's Freedom Food Group.

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(Reporting by Byron Kaye and Naomi Tajitsu; Editing by Shri Navaratnam)