TREASURIES-Bonds slip on stock gains, tame PPI curbs loss

* Producer prices rise less than expected in May

* Housing starts rebound in May from record lows

* Industrial output falls more than expected in May

* Fed to buy debt maturing in 3 to 4 years (Adds industrial production data)

By Richard Leong

NEW YORK, June 16 (Reuters) - U.S. Treasury debt prices fell on Tuesday as rising stock index futures curbed safe-haven demand for bonds, but data showing a mild rise in May producer prices helped curb the selloff.

Investors have grown concerned over the inflationary fallout from the government's burgeoning deficit to fund its bailouts and stimulus package.

"A lot of people have said they are worried about inflation, but I think that's far down the road," said Gary Thayer, senior economist with Wells Fargo Advisors in St. Louis.

So far, the evidence of inflation as an economic threat has remained remote as the United States remains stuck in the worst recession in decades.

The government's Producer Price Index rose 0.2 percent last month, below the 0.6 percent gain by expected analysts and the the 0.3 percent increase in April. See [ID:nN16267986].

Price pressure has been contained, which is supportive for bond prices, as consumer demand and factory production has fallen during the current global downturn.

The Federal Reserve reported on Tuesday U.S. industrial output fell by a steeper-than-expected 1.1 percent in May, while capacity utilization stepped down to a record low of 68.3 percent. For details, see [ID:nWEQ001106]

While the manufacturing sector signaled a renewed struggle, the latest housing data offered a ray of hope for the economy.

The Commerce Department reported housing developers broke ground at an annualized rate of 532,000 units in May, far above a median forecast of 490,000 unit rate.

This compares with a downwardly revised annualized pace of 454,000 in April, which was the lowest since records began in January 1959. [ID:nN15197725]

The price on benchmark 10-year notes US10YT=RR was down 6/32 at 94-30/32. The yield, which moves inversely to the price, was 3.74 percent, up from 3.72 percent late on Monday but far below the eight-month high of 4 percent last week.

The major U.S. stock indexes .DJI .SPX .IXIC SPc2 opened about 0.3 percent higher. [.N]

Later Tuesday, the Fed will buy Treasuries maturing in three to four years, part of a program aimed to lower long-term borrowing costs to revive growth.

Since late March, the U.S. central bank has purchased $157 billion in U.S. government debt, more than 50 percent of the amount it pledged to buy.

(Additional reporting by Ellen Freilich) (Editing by Theodore d'Afflisio)