TREASURIES-Pause slide in Asia ahead of auction

* U.S. Treasury to sell $35 bln of 3-year notes

* Yield spike in short-term notes may help attract demand

* Poor auction result may add to supply worries

By Satomi Noguchi

TOKYO, June 9 (Reuters) - U.S. Treasuries were steady in Asia on Tuesday ahead of an auction of three-year notes, pausing after a three-day slide compounded by talk that the Federal Reserve may raise interest rates later this year.

The auction of $35 billion of three-year notes is the first of three sales by the U.S. Treasury this week, and the market may slide more if it goes poorly and adds to supply concerns.

But analysts said the spike in short-term yields since late last week may draw decent demand from investors, despite talk that the economy is set to rebound in the second half of the year and that the Fed will have to depart from its near-zero interest rate policy.

"The rise in short-term yields was triggered by investors re-assessing the curve steepening, preparing for a slight risk of a Fed rate hike," said Yasutoshi Nagai, chief economist for Daiwa Securities SMBC.

"But the majority of investors still believe the chance of a Fed rate hike in the near-term is almost nil, although the related bond price levels show a different picture," Nagai said.

Two-year notes edged up in price from late New York trade on Monday to yield 1.395 percent US2YT=RR, after rising above 1.40 percent the previous day for the first time since November.

U.S. short-term interest rate futures, which track market expectations for Fed rate policy, saw their first meaningful move in months on Friday. They are now fully pricing in an increase in the overnight federal funds rate to 0.5 percent in December, and possibly more.

The Fed lowered the funds rate to a range of zero to 0.25 percent in December last year as it tried to halt the worst financial crisis since the Great Depression of the 1930s.

The benchmark 10-year note was little changed in price to yield 3.876 percent US10YT=RR after climbing as high as around 3.91 percent on Monday, their highest since November.

The difference between yields on two- and 10-year notes stayed narrow around 247 basis points, after widening to record levels around 281 basis points on Friday.

The market will absorb more Treasury sales of coupon securities this week with $19 billion in 10-year notes on Wednesday and $11 billion in 30-year bonds on Thursday.

The flood of new debt has some investors fretting over the possibility of rising inflation in the longer term as government deficits grow, putting upward pressure on yields of longer maturities. (Editing by Hugh Lawson)