(Updates with reaction to downed Malaysian passenger plane, comment, prices)
NEW YORK, July 17 (Reuters) - U.S. Treasury prices rose on Thursday as investors sought a safe haven after news a Malaysian passenger plane came down over eastern Ukraine, an area of increasing conflict between the government and pro-Moscow rebels.
The move up in prices resulted in yields on the benchmark 10-year Treasury falling in their steepest one-day drop since early February, according to Reuters data.
Both sides in the Russia-Ukraine conflict denied involvement in the incident. If confirmed as a missile strike, the tragic incident would represent significant collateral damage in an increasingly bloody battle for control over Ukraine's territory.
The lost plane along the Russian-Ukraine border comes one day after the United States imposed a new round of sanctions on key players in Russia's economy because of what it views as Moscow's interference in Ukraine.
"It really surprised the market," said Kathy Jones, fixed income strategist at Charles Schwab in New York, in reference to the crash of the Malaysian airliner.
"Between the U.S. announcing more sanctions... and not knowing what the consequences of that will be and then this, if you're so inclined to be taking a lot of risk right now, you might want to pull back," she said.
Additional gains came late in the New York day on news that Israel launched a ground offensive in Gaza. Prime Minister Benjamin Netanyahu's office issued a statement saying the operation was launched "in order to hit the terror tunnels from Gaza into Israel."
In late New York trade, the 10-year Treasury yield had its biggest one day decline in 5-1/2 months, while the level itself fell to 2.4490 percent, its lowest since mid-May. The price rose 20/32 of a point..
The 30-year bond rose nearly 1-1/2 points in price, pulling the yield down to 3.2660 percent, matching a May 29 nadir which remains the lowest since June 2013.
U.S. Treasuries were already strengthening before the geopolitical ructions in Ukraine and Israel came to light.
It started with disappointing U.S. housing data where June housing starts showed the slowest pace of groundbreaking in nearly a year, reinforcing a view that U.S. monetary policy will remain loose well into 2015.
"We have a stark reminder that the rebound in the housing market we have seen has stalled. This is a response of the industry to slowing overall sales. The tight lending standards have narrowed the pool of buyers," said Anthony Karydakis, chief economic strategist at Miller Tabak in New York.
The housing data stood in contrast to a report showing improvement in the jobs market. The number of Americans filing new claims for unemployment benefits unexpectedly fell last week by 3,000 to a seasonally adjusted 302,000 for the week ended July 12, according to the U.S. Labor Department.
(Additional reporting by Richard Leong and Sam Forgione in New York; Editing by Bernadette Baum)