TREASURIES-Bonds tumble on stock gains, debt anxiety

* Hedging on corporate supply intensifies sell-off

* Jobless claims suggest slowing labor deterioration

* Some jitters persist ahead of Friday's payroll report

* Two-to-10-year yield curve steepens, near record level (Updates market action, changes byline)

By Richard Leong

NEW YORK, June 4 (Reuters) - U.S. government debt prices fell on Thursday as investors favored stocks over Treasuries on an upbeat outlook on banks and less-dire readings on jobless claims.

Persistent inflation worries linked to the government's $2 trillion new borrowing also exerted downward pressure on bonds, sending prices lower for the first time in three sessions.

Hedging on a spate of corporate debt supply intensified the selloff, analysts said. This move, known as rate-locking, protects issuers and dealers from changes in the spread between corporate debt rates and Treasury yields.

The weakness in Treasuries came in advance of Friday's government payroll report, which investors will use to gauge whether the U.S. economy is stabilizing.

"There's caution in the Treasuries market. There's also some concerns about tomorrow's (jobs) number," said Kevin Giddis, head of fixed income sales, trading and research at Morgan Keegan in Memphis, Tennessee.

The benchmark 10-year Treasury notes US10YT=RR was trading 1-14/32 lower in price and their yield, which moves inversely to price, was 3.71 percent, up 18 basis points from late Wednesday.

The yield gap between 10-year and two-year notes US2YT=RR steepened to 276 basis points, just a hair below its record wide of 277 basis points set this week.

The yield difference between short-dated and long-dated Treasury issues has been expanding as traders expect faster economic growth and higher inflation in the future. It also makes lending more profitable because banks borrow at a lower rate and lend at a higher level.

An upbeat brokerage report on the banking industry helped lift Wall Street. Major stock indexes .DJI .IXIC .SPX were up as much 1 percent. For more, see [.N] (Additional reporting by Chris Reese and Mary Angela Rowe; Editing by James Dalgleish)