TREASURIES-U.S. bond prices up as euro zone short rates halt rise

* Recent price cuts draw buyers

* Market focusing on short-term European swap rates

* TR/University of Michigan consumer sentiment dips

NEW YORK, Jan 18 (Reuters) - U.S. government debt prices rose on Friday as recent price cuts drew buyers and in step with movements in European short-term money markets.

Short-term European swap rates have recently risen on concern about potentially tighter monetary conditions if European banks begin returning cash they borrowed about a year ago through three-year loans from the European Central Bank.

But on Friday the recent spike in short-term money market rates related to that concern came to a halt after a top ECB policymaker played down the chance of banks repaying a big chunk of their LTRO cash this month.

European banks took more than one trillion euros of ultra-cheap, three-year loans from the ECB in two separate offers about a year ago as the ECB sought to stabilize Europe's crisis-hit financial system. The banks are allowed to start returning the cash in weekly installments beginning Jan. 30. The ECB will publish the first repayment amount on Jan. 25.

Expectations of the amount to be paid back have increased to as much as 300 billion euros, analysts say, which would effectively halve the amount of excess liquidity in the system.

"Short-term European swap rates have been leading the rest of the markets," said Zach Pandl, strategist at Columbia Management. "The concern is what it will mean for short-dated rates if banks start paying back the loans and the ECB allows liquidity to come out of the European banking system."

While one- to two-year rates in the euro zone spiked up on Thursday, the rates eased this morning, Pandl noted.

"You've had much more volatility in these markets in the last two months than you have had in the last year," he said. "This is the topic du jour in the rates market," he said.

The risk, while slim, that the United States might default if it does not raise its borrowing limit in the next few weeks also supported a risk-averse bid for safe-haven U.S. debt. That's because investors really see the U.S. debt ceiling tussle as a temporary issue and regard the U.S. debt market as one of the safest places to park cash.

Republicans in the U.S. House of Representatives have signaled they might support a short-term extension of U.S. borrowing authority next month so they can move on to other budget battles.

Benchmark 10-year Treasury notes rose to session highs at midday, up 12/32 in price, their yields easing to 1.84 percent from 1.88 percent late on Thursday.

An unexpected drop in the preliminary January reading of the Thomson Reuters/University of Michigan consumer sentiment index to its lowest level since 2011 was also supportive.

"The realization that paychecks are going to be smaller due to the sunset of the payroll tax holiday" probably weighed on consumer attitudes, said Thomas Simons, money market economist at Jefferies & Co.

The end of the payroll tax cut is supportive for Treasuries because it reduces consumers' take-home pay and, consequently, their ability to buy products and services. Less spending damps growth and inflation, a positive for U.S. Treasuries since inflation erodes the value of fixed-income assets.

"People are realizing the removal of the payroll tax cut might be more significant than what they had expected," said Krishna Memani, chief fixed-income investment officer at New York-based Oppenheimer Funds, the latter with $195.7 billion in assets under management.