TREASURIES-Prices fall as jobless rate improves, new supply due

(Adds details, quote, updated prices)

By Karen Brettell

NEW YORK, Oct 5 (Reuters) - U.S. Treasuries prices fell on Friday as an unexpected drop in the U.S. jobless rate helped boost expectations for an improving economy and as dealers prepared for new long-dated debt sales next week.

The U.S. Labor Department said the unemployment rate fell to a four-year low of 7.8 percent in September, down from 8.1 percent in August, as 114,000 jobs were added.

"The big shock was the drop in the rate, the consensus number was right in line," said Sean Murphy, a Treasuries trader at Societe Generale in New York.

Treasuries sold off as investors saw the data as signaling an improving economy, if still tepid growth.

"Given that the data has been a little bit better than expectations over the course of the week we are probably sitting a little bit rich," said Murphy.

Benchmark 10-year notes fell 120/32 in price to yield 1.74 percent, the highest level since Sept. 24. Thirty-year bonds

dropped 1-20/32 in price to yield 2.97 percent, just above the debt's 200-day moving average and the highest level since Sept. 21.

The long bonds' yields are now seen approaching the 3 percent level, where they traded before the Fed announced its third round of easing on Sept. 13, as dealers prepare for a new supply next week.

"There is no incentive for a dealer to step up and take paper in front of next week's supply," said Chris Ahrens, an interest rate strategist at UBS in Stamford, Connecticut.

The sales will also occur in a U.S. holiday-shortened week, with bond markets closed on Monday for the Columbus Day.

Treasuries also weakened after a report that the European Central Bank envisions buying large volumes of sovereign bonds helped Spanish debt spreads rally and reduced demand for safe haven bonds.

"In Europe, the peripheral spreads came crashing in today. All these factors weigh on Treasuries at these low levels of rates," said Ahrens.

The ECB may buy large volumes of sovereign bonds for a period of one to two months once its programme of "Outright Monetary Transactions" is launched, but would then suspend purchases during an assessment period, senior central bank sources told Reuters.

The Federal Reserve sold $7.802 billion in U.S. Treasury coupons on Friday maturing from February 2013 to February 2014 as part of its "Operation Twist" stimulus program that extends the average maturity of the central bank's Treasury holdings in order to lower mortgage rates and other long-term borrowing costs.

Some analysts expect the Fed may extend quantitative easing to Treasuries, from mortgage-backed debt, when Operation Twist expires at the end of the year.

(Editing by Bob Burgdorfer)

(( 646 223 6274)(Reuters Messaging:

((-------MARKET SNAPSHOT AT 2:48 p.m. EDT (1848 GMT)-------

Change vs Current Nyk yield Three-month bills 0.1025 (+0.00) 0.104 Six-month bills 0.14 (+0.00) 0.142 Two-year note 99-31/32 (-01/32) 0.262 Five-year note 99-25/32 (-06/32) 0.671 10-year note 98-31/32 (-19/32) 1.739 30-year bond 95-20/32 (-1-20/32) 2.972 DOLLAR SWAP SPREADS LAST Change U.S. 2-year dollar swap spread 13.75 (+0.50) U.S. 3-year dollar swap spread 13.25 (+0.50) U.S. 5-year dollar swap spread 14.25 (+0.25) U.S. 10-year dollar swap spread 6.50 (-0.75)

U.S. 30-year dollar swap spread -21.00 (-0.25)))