UPDATE 2-Rouble slides towards 2-year low on U.S. sanctions 'bill from hell'

* Rouble weakens beyond 65 vs dollar, 75 vs euro

* Slump sets in after newspaper prints U.S. sanctions bill

* Sell-off hits government bonds, stocks (Recasts to updates prices, adds detail)

MOSCOW, Aug 8 (Reuters) - The rouble slid towards its lowest level in nearly two years on Wednesday and investors sold off bonds and stocks after the Kommersant daily published what it said was the full text of a draft U.S. law detailing possible penalties against Russia.

Republican and Democratic U.S. senators introduced the draft legislation last week, the latest effort by lawmakers to punish Moscow for its alleged interference in U.S. elections and its activities in Syria and Ukraine.

Republican Senator Lindsey Graham, one of the measure's lead sponsors, called it "the sanctions bill from hell."

Russian market reaction was muted at the time, however, and jitters only set in on Wednesday after Kommersant's publication of the sanctions document https://www.kommersant.ru/docs/2018/t2018d140-Menendez-Russia-Sanctions-Bill.pdf which cited potential curbs on the operations of several state-owned Russian banks in the United States and restrictions on holding Russian sovereign debt.

The rouble weakened beyond the psychological thresholds of 65 versus the dollar and 75 against the euro, briefly touching levels against the dollar last seen in April and within a few kopecks of a low last seen in November 2016.

"The rouble is hit by the sanctions theme. Even though there will be no real action until September, the signal is already there," a dealer at a major Western bank in Moscow said.

As of 1255 GMT, the rouble was 2.2 percent weaker at 64.90 against the dollar. Versus the euro, the rouble was 2.1 percent weaker at 75.18.

Russia's five-year credit default swaps (CDS), which reflect the cost of insuring Russian debt against default, rose to their late June high of 145, up from 133-134 earlier this week .

"There are a lot of geopolitical concerns investors have and that's being reflected in a higher risk premium on Russian assets," said Phoenix Kalen, director of emerging markets strategy, at Societe Generale in London.

"The probabilities are such that this bill is still relatively unlikely to become law and with that assumption in mind then I wouldn't expect the rouble to sell off significantly from here," Kalen added.

The U.S. measure's prospects are unclear. It would have to pass both the Senate and House of Representatives and be signed into law by President Donald Trump.

"But even so, the document clearly shows the determination to go further than before in order to cause damage for Russia," Barclays said in a note.

The jitters also sparked a sell-off in Russian treasury bonds, known as OFZs, sending their prices lower and lifting their yields. Yields in 10-year OFZ bonds jumped to 8.12 percent, their highest since mid-March 2017.

"The sanctions story will be one that resurfaces from time to time, especially with Republicans trying to figure out how to position themselves ahead of the mid-term elections in contrast to President Trumps position, so it is likely that we will see these bursts of pressure on Russian assets," said Societe Generale's Kalen.

STOCKS BATTERED

Shares in Russia's largest lender Sberbank dropped to 192.50 roubles on the Kommersant report, losing more than 4 percent on the day and hovering at their lowest since mid-April.

Shares in Russia's second-largest bank VTB were also down - by 2.1 percent - underperforming the benchmark stock index MOEX which declined 0.9 percent to 2,290.5.

Russian business conglomerate Sistema saw its shares tumble by 3.6 percent, hit by the threat of targeted sanctions after Republican Representative Ileana Ros-Lehtinen said on her Twitter account on Tuesday that an investigation was underway into Sistema's chairman Vladimir Yevtushenkov for "operations in illegally annexed Crimea."

Sistema's spokesman said the company had no investments in Crimea, the Black Sea peninsula that Russia annexed from Ukraine in 2014.

For Russian equities guide see

For Russian treasury bonds see (Additional reporting by Karin Strohecker and Claire Milhench in London and Vladimir Abramov and Anastasia Teterevleva in Moscow Writing by Andrey Ostroukh and Andrew Osborn Editing by Alexandra Hudson and Mark Potter)