TREASURIES-Bonds rise on safety bid as Greece fears deepen

* Anxiety over contagion from Europe fuels safety bids

* U.S. reduces debt sale sizes for first time in 3 years

* Traders shrug off ADP private job, ISM services data

* Ten-year yield touches lowest level so far this year (Updates market action, changes byline)

By Richard Leong

NEW YORK, May 5 (Reuters) - U.S. Treasury debt prices rose on Wednesday, driving benchmark yields to their lowest level since December, as deepening anxiety over the Greek debt crisis sent investors to low-risk assets for a second straight day.

A proposed 110 billion euro aid package for Greece has failed to sooth concerns that the fiscal problems saddling Greece and perceived weaker euro zone nations will hurt the banking system and worldwide economic growth.

The nagging uneasiness has overshadowed encouraging U.S. economic data and spurred investors to favor Treasuries and other safe-haven investments over stocks and other risky assets, analysts and investors said.

"At this point, it's pure flight-to-quality," said Jim Barnes, fixed income portfolio manager at National Penn Investors Trust Co. in Wyomissing, Pennsylvania. "When you look at things domestically, things are looking more positive."

An announcement by the Treasury Department that it will pare the amount of debt it will sell for the first time in three years added to strength in the bond market. Treasury will auction $78 billion worth of coupon-bearing securities at its May refunding next week, down from a record issuance of $81 billion at the February refunding. [ID:nN05160709]

New data showing further strength in the U.S. economy and labor market had little impact.

Payrolls processor ADP reported that private-sector jobs grew in April, two days ahead of the government's monthly payroll survey. See [ID:nEAP103001]

And the Institute from Supply Management reported that the services sector, which accounts for nearly 90 percent of the U.S. economy, grew for a fourth straight month.

An improving U.S. economy supports the case that the Federal Reserve will raise interest rates at year-end to curb inflation before the economy overheats.

But the jitters over Greece's fiscal situation, which sent the euro EUR= to a 14-month low against the dollar, dominated sentiment. [FRX/]

"European contagion is really the name of the game. That's all we're watching," said Rick Klingman, managing director of Treasury trading at BNP Paribas in New York.

Yields on the debt of peripheral European countries continued to rise on Wednesday, while the cost to insure five-year Greek bonds hit an all-time high.

An analyst at Moody's Investors Service said the ratings agency was more likely to downgrade Portugal's credit rating after putting it on a three-month review on Wednesday.

Wednesday's safe-haven rush in Treasuries was centered on short-dated issues, which widened their yield differences against longer-dated maturities.

The spread between two-year and 10-year note yields grew to 267 basis points from 264 basis points late on Tuesday.

The price on two-year Treasury notes US2YT=RR, which moves inversely to the yield, was up 4/32 at 100-8/32 for a yield of 0.88 percent, down 7 basis points from late Tuesday.

The yield on benchmark 10-year notes US10YT=RR was 3.55 percent, down from 3.60 percent late on Tuesday. It hit 3.49 percent earlier, the lowest level since mid-December, according to Reuters data.

Major U.S. stock indexes lost ground, with the Standard & Poor's 500 .SPX falling 0.25 percent. For more, see [.N] (Additional reporting by Emily Flitter; Editing by Leslie Adler)