TREASURIES-Bonds stumble as data renew inflation jitters

* ISM factory data fans inflation worries

* U.S. long bond falls more than 1 point

* Less anxiety over Greece reduces safety bid for bonds

* Obama 2011 budget plan garners muted market reaction (Updates market action, adds details)

By Tom Ryan

NEW YORK, Feb 1 (Reuters) - U.S. Treasury bonds fell on Monday after a report showed U.S. manufacturing grew at the fastest rate in more than 5-1/2 years in January, rekindling worries about inflation and curbing safe-haven demand for bonds.

Inflation concerns pushed prices on 30-year Treasury bonds down more than a point as stocks gained after the Institute for Supply Management reported accelerated growth in the factory sector last month. For more, see [ID:nWEN9407]

The ISM data also showed a surge in price pressures paid due to improving demand for manufactured goods, as well as an expansion in factory payrolls. The spike in the prices paid index to its highest in five years unsettled expectations that inflation will stay tame and the Federal Reserve will be able to stick to its near-zero interest rate policy for an extended period.

"The cost structure surge from an inflation perspective is not particularly good for bonds," said Jay Mueller, senior portfolio manager with Wells Capital Management, in Milwaukee, Wisconsin.

The price of the 30-year bond US30YT=RR, which is vulnerable to a pickup in inflation worries, fell 1-2/32 to 97. Its yield, which moves inversely to price, was 4.56 percent, up from 4.49 percent on Friday.

Benchmark 10-year notes US10YT=RR fell 17/32 in price to yield 3.66 percent, up from 3.59 percent late on Friday.

Wall Street traded higher, with benchmark stock indices rising as much as 1 percent. .N

Treasury bond prices had moved lower in European trading ahead of U.S. President Barack Obama's budget, which projected a record deficit in 2010. [ID:nLDE6100NC]

OBAMA'S BUDGET, GREECE

Bonds' reaction to U.S. President Barack Obama's 2011 budget proposal was muted. His plan contains measures to stimulate an economic revival amid fresh evidence consumer spending is still sluggish. For more, see [ID:nN31157907]

The government reported consumer spending rose 0.2 percent in December, less than forecast. [ID:nN2999450].

The White House's $3.8 trillion plan would send the federal deficit to a record $1.56 trillion, or 10.6 percent of gross domestic product. The Treasury Department is expected to unveil details on its quarterly borrowing needs later on Monday to help fund its ballooning budget gap.

While investors have been worried about the size of Obama's proposed budget on United States' indebtedness, there have been even greater angst about fiscal problems in Europe.

Investors have been jittery Greece's fiscal woes could spread across the continent. Anxiety about European sovereign credits had fueled a bid for Treasuries last week.

Sovereign risk "is not as worrisome today," said Tony Crescenzi, market strategist and portfolio manager with Pacific Investment Management Co in Newport Beach, California.

"But there's still enough anxiety in the sovereign credit sphere to keep Treasuries from falling to too much," he said.

Greece's deficit-cutting plan is ambitious but achievable, the EU economic and monetary affairs commissioner said on Monday, warning however that Athens may have to take extra measures to shore up its finances. [ID:nLDE6101HO] (Reporting by Tom Ryan, additional reporting by John Parry; Editing by Andrew Hay)