TREASURIES-Bond prices gain as Europe worries continue


* Spain rating cut underscores euro zone fears

* U.S. jobless claims fall to lowest level in over 4 years

* U.S. sells $13 billion in 30-year bonds

* Fed buys $1.25 billion TIPS for Operation Twist

(Updates to late afternoon)

By Richard Leong and Luciana Lopez

NEW YORK, Oct 11 (Reuters) - U.S. Treasuries prices advancedon Thursday in choppy trade as fears about the euro zone'shealth after a downgrade of Spain's debt rating and uncertaintyaround November's U.S. election outweighed a muted sale of30-year debt.

The U.S. Treasury sold $13 billion of 30-year bonds at ahigh yield of 2.904 percent. Analysts said demand was soft, withprimary dealers accounting for the highest share of purchasessince January.

The result was a contrast to auctions earlier in the week ofthree- and 10-year debt, which both saw stronger demand.

"The auction looked weak, but I prefer to look at thebroader picture," said Suvrat Prakash, an interest ratestrategist with BNP Paribas in New York.

"When you look at all three auctions, it tells you quitestrongly that investor demand is there and there's good supportfor the market to be at these historically low rates."

Investors fears were underscored by a downgrade to Spain'ssovereign credit rating by Standard & Poor's late on Wednesdayto barely above junk status. Markets are also waiting for theresults of a review of Spain's rating by Moody's InvestorsService, which could slash the country to junk. Those resultsare expected this month.

Spain's rating woes piled on the pressure for the country toseek help from its European partners, which would make it thelargest economy yet in the monetary union to ask for afull-blown bailout.

Nonetheless, Treasuries seesawed for part of the session, asdata suggested the U.S. labor market might be strengthening.

First-time filings for unemployment benefits unexpectedlyfell in the latest week to their lowest level since February2008, but the government said one-time factors likely caused thesteep 30,000 drop.

"This suggests some improvement in the labor market," whichfueled some selling in Treasuries earlier in the session, saidDavid Keeble, global head of interest rate strategy at CreditAgricole Corporate & Investment Bank in New York.


Graphics:Euro debt crisis:U.S. jobless claims:U.S. trade deficits:U.S. import prices:


Meanwhile, the Federal Reserve purchased $1.25 billion inTreasury inflation protected securities under its OperationTwist, which involves selling shorter-dated Treasuries andbuying longer-dated issues to try to hold down long-termborrowing costs to bolster the economy.

The U.S. Treasury said on Thursday it will reopen a 30-yearTIPS issue by $7 billion on Oct. 11.

In the open market, regular 10-year Treasury notes

were 02/32 higher in price, yielding 1.673 percent,from 1.680 percent late on Wednesday.

Thirty-year bonds

rose 18/32 in price afterflirting with a near 1 point drop earlier. The 30-year yield waslast at 2.856 percent, from 2.885 percent late on Wednesday.

Treasuries might be safe vehicles to park cash until thereis progress with the debt problems in Europe and U.S. lawmakersdeal with expiration of major tax breaks and automatic spendingcuts at year-end, known as "the fiscal cliff," analysts andinvestors said.

"We are bouncing around in a range here. This is a goodentry here," said Matt Duch, portfolio manager at CalvertInvestment Management in Bethesda, Maryland, which overseesabout $12 billion in assets.

(Editing by James Dalgleish and Leslie Adler)

((luciana.f.lopez@thomsonreuters.com)(+1 646 223 6319)(ReutersMessaging: luciana.f.lopez.thomsonreuters.com@reuters.net))

((-------MARKET SNAPSHOT AT 3:32 p.m. EDT (1932 GMT)-------March T-Bond(+)March 10-Year note(+)Change vs CurrentNyk yieldThree-month bills0.1 (+0.00) 0.102Six-month bills0.1475 (+0.00) 0.150Two-year note99-31/32 (-) 0.270Five-year note99-26/32 (-01/32) 0.66210-year note99-18/32 (+02/32) 1.67330-year bond97-28/32 (+18/32) 2.856DOLLAR SWAP SPREADSLAST ChangeU.S. 2-year dollar swap spread 11.50 (-0.50)U.S. 3-year dollar swap spread 11.00 (unch)U.S. 5-year dollar swap spread 12.75 (-0.25)U.S. 10-year dollar swap spread 4.25 (-1.00)

U.S. 30-year dollar swap spread -23.50 (-1.25)))