CORRECTED - TREASURIES-Bonds fall as stocks rally before supply, FOMC

(Please read in 16th paragraph $1.25 trillion instead of $1.25 billion. Corrects amount.)

* Wall Street gains reduce safety bid for bonds

* Traders make room for record $23 bln 10-year note sale

* Eyes on Fed for clues to future of Treasuries purchases (Updates market action, quote)

By Richard Leong

NEW YORK, Aug 12 (Reuters) - U.S. Treasury debt prices fell on Wednesday as a Wall Street rally pared safe-haven demand for bonds and traders made room for a record $23 billion in 10-year government note supply to be auctioned in the afternoon.

Most investors moved to the sidelines ahead of the Federal Reserve's statement from its two-day policy meeting, which ends Wednesday. It may contain clues as to whether the Fed may tweak its Treasury purchase program, which is the cornerstone of its quantitative easing policy to bring the U.S. economy out of its worst downturn in 70 years.

The Federal Open Market Committee, the U.S. central bank's policy-setting group, will release a statement at about 2:15 p.m. (18:15 GMT) .

Stocks' rise is "pushing down bonds. People are also setting up for the 10-year auction," said Mark Pawlak, market strategist at Keefe, Bruyette & Woods in New York.

The Treasury Department's 10-year note sale follows a stellar $37 billion three-year note auction on Tuesday. The Treasury will complete its record $75 billion quarterly refunding on Thursday with the sale of $15 billion 30-year bonds, the largest ever for this maturity.

"The 10-year auction may be handicapped ahead of the Fed statement," Pawlak said.

The price on benchmark 10-year Treasury notes US10YT=RR traded down 7/32 at 95-11/32, erasing an earlier 9/32 gain.

Its yield, which moves inversely to its price, was 3.70 percent, up from 3.67 percent late on Tuesday but below a two-month high of 3.89 percent set last Friday.

The "when-issued" market shows traders expect the new 10-year notes to yield 3.70 percent, equal to the 10-year yield traded in the open market.

The three major U.S. stock indexes .DJI .SPX .IXIC were up more than 1.3 percent on strength in financial and semiconductor shares. Wall Street slumped on Tuesday on doubts about a recovery in the banking sector and the overall economy. For more, see [ID:nN12528576]

FED'S TREASURY BUYING

There has been anxiety over appetite, especially from overseas investors, for long-dated Treasuries in light of the government's burgeoning borrowing to fund its massive stimulus package and various economic bailouts.

The Fed's purchase of Treasuries since late March has sopped up some of the surge in Treasuries issuance.

This asset-buying program, part of the Fed's quantitative easing policy to stimulate the economy, is approaching its $300 billion limit and has raised speculation on whether the central bank may extend the program.

"I think most traders think the Fed will allow it to end," said Lou Brien, market strategist with DRW Trading in Chicago.

Traders are also searching for signals from the Fed on its purchases of U.S. agency and mortgage-backed securities, which began with the goal to bring down mortgage rates to help stabilize the battered housing market.

The Fed has said it would buy up to $200 billion in agency debt and $1.25 trillion in mortgage-backed securities.

In its statement, the FOMC is expected to pledge it will keep its near zero interest rate policy in an effort to encourage a recovery, analysts said.

"The Fed is a long way off from moving away from its easy policy. We are at least a year away, if not longer," DRW's Brien said. (Editing by Andrea Ricci)