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 advanced on Thursday in choppy trade as fears about the euro zone's health after a downgrade of Spain's debt rating and uncertainty around November's U.S. election outweighed a muted sale of 30-year debt.

The U.S. Treasury sold $13 billion of 30-year bonds at a high yield of 2.904 percent. Analysts said demand was soft, with primary dealers accounting for the highest share of purchases since January.

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

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

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

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

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

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

First-time filings for unemployment benefits unexpectedly fell in the latest week to their lowest level since February 2008, but the government said one-time factors likely caused the steep 30,000 drop.

"This suggests some improvement in the labor market," which fueled some selling in Treasuries earlier in the session, said David Keeble, global head of interest rate strategy at Credit Agricole 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 in Treasury inflation protected securities under its Operation Twist, which involves selling shorter-dated Treasuries and buying longer-dated issues to try to hold down long-term borrowing costs to bolster the economy.

The U.S. Treasury said on Thursday it will reopen a 30-year TIPS 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 after flirting with a near 1 point drop earlier. The 30-year yield was last at 2.856 percent, from 2.885 percent late on Wednesday.

Treasuries might be safe vehicles to park cash until there is progress with the debt problems in Europe and U.S. lawmakers deal with expiration of major tax breaks and automatic spending cuts at year-end, known as "the fiscal cliff," analysts and investors said.

"We are bouncing around in a range here. This is a good entry here," said Matt Duch, portfolio manager at Calvert Investment Management in Bethesda, Maryland, which oversees about $12 billion in assets.

(Editing by James Dalgleish and Leslie Adler)

(( 646 223 6319)(Reuters Messaging:

((-------MARKET SNAPSHOT AT 3:32 p.m. EDT (1932 GMT)------- March T-Bond (+) March 10-Year note (+) Change vs Current Nyk yield Three-month bills 0.1 (+0.00) 0.102 Six-month bills 0.1475 (+0.00) 0.150 Two-year note 99-31/32 (-) 0.270 Five-year note 99-26/32 (-01/32) 0.662 10-year note 99-18/32 (+02/32) 1.673 30-year bond 97-28/32 (+18/32) 2.856 DOLLAR SWAP SPREADS LAST Change U.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)))