* Yields fall further after sharp overnight drop
* 10-year yield hits 3-mth low, flattens yield curve (Adds details)
TOKYO, Dec 4 (Reuters) - Yields of longer-dated U.S. Treasuries extended their decline on Tuesday following a sharp overnight slump, pushing the two-year/10-year spread to a new 11-year low.
Treasury yields have fallen steadily since the Federal Reserve suggested late last week that it may be nearing an end to its three-year rate hike cycle.
"Short covering in the bond futures by speculative players appears to have picked up pace after last week's comments from Fed officials, driving down yields in turn," said Shuichi Osaki, rates strategist at Merrill Lynch Japan Securities.
The benchmark 10-year Treasury note yield fell about 7 basis points (bps) to 2.937 percent, its lowest since Sept. 11.
The spread between two-year and 10-year yields continued to flatten and fell below 14 bps, the narrowest since July 2007. The curve has flattened as the Fed's interest rate hikes have sent short-dated yields higher, while tepid inflation and slowing global growth have capped the rise of longer-dated Treasury yields.
"A flatter yield curve is often associated with a slowing economy. But U.S. indicators remain relatively strong, and we do not see signs of a recession yet. The curve flattening could therefore peter out towards the year's end," Osaki at Merrill Lynch Japan Securities said.
The curve between three-year and five-year notes inverted for the first time since 2007 on Monday and was last at minus 1.6 bps.
It was the first part of the Treasury yield curve to invert since the financial crisis, excluding very short-dated debt.
"The yield inversion is something to pay attention to but nothing to panic about..we are still not clear on what catalyst would cause a U.S. recession," said Sim Moh Siong, currency strategist at Bank of Singapore.
Solid U.S manufacturing data on Monday pointed to a stronger economic outlook, with new orders a key driver in boosting activity. (Additional reporting by Vatsal Srivastava in Singapore Editing by Shri Navaratnam and Kim Coghill)