UPDATE 2-Treasury warns of wide impact if U.S. sanctions Russian debt

(Adds direct reference to the report in paragraphs 1,2 and 6)

WASHINGTON, Feb 2 (Reuters) - The U.S. Treasury Department said in a report submitted to Congress earlier this week that expanding sanctions on Russia to include new sovereign debt would have "negative spillover effects" on global financial markets and businesses.

Given Russia's large economy and deep connections to world markets, widening debt-related sanctions could hurt "both the Russian Federation and U.S. investors and businesses," said the report, submitted to Congress on Monday and obtained by Reuters Friday.

Russian government bonds, known as OFZs, rallied on the news of Treasury's position.

Investors of OFZ bonds, popular among foreign market players for their lucrative yields, have been on the alert about new sanctions recently and have preemptively bought into Russian debt for fear of losing access to them in the future.

Bloomberg first reported the content of the Treasury report on Friday.

Sanctions against sovereign debt, Treasury said in its report, could put downward pressure on Russian economic growth, increase the strain on the banking sector and "lead to Russian retaliation against U.S. interests."

It warned that sanctions on sovereign debt could affect the "competitiveness of large U.S. asset managers."

A Treasury spokesman did not immediately respond to questions about the document.

U.S. President Donald Trump's administration on Tuesday published a list of 210 Russians, including 96 so-called oligarchs worth $1 billion or more, as required under a sanctions law passed by Congress.

But it did not immediately impose any new penalties on them, drawing criticism from senior Democrats in Congress, who accused Trump of being soft on Russian President Vladimir Putin.

Treasury Secretary Steve Mnuchin told lawmakers at a hearing on Tuesday that new sanctions would eventually be levied on Russia in response to Moscow's interference in the U.S. election.

(Reporting by Katanga Johnson, Patricia Zengerle and Joel Schectman; Editing by Mary Milliken and Bernadette Baum)