* Anxiety fuels safety bids for U.S. government bonds
* Benchmark 10-year yield seen making run toward 3 pct
* Traders brush off April rise in U.S. existing home sales
(Updates market action, adds quotes)
NEW YORK, May 24 (Reuters) - U.S. Treasury debt prices rose on Monday as nagging worries over Europe's financial troubles rekindled selling in stocks and the euro, creating a fresh wave of safe-haven bids for bonds.
In the latest development in the euro zone, the Bank of Spain took over CajaSur, a small savings bank, this weekend after a planned merger with another bank fell through. For more, see [ID:nLDE64L007]
The Spanish bank news underscored the euro zone's debt problems and highlighted the region's importance to the U.S. economic recovery because of its size and trade opportunities.
"People are piling money into dollars and Treasuries, hoping they can ride out the storm," said John Canally, economist and investment strategist at LPL Financial in Boston.
Investors' fervor for safety will likely benefit the $113 billion worth of coupon-bearing notes the government will auction later this week, analysts said.
In this jittery climate, the yield on benchmark 10-year Treasuries US10YT=RR could make a run down to the psychological resistance level of 3.00 percent after touching a trough of 3.10 percent, the lowest in a year, on Friday. It last traded at 3.20 percent, down 4 basis points from Friday.
So far this month, the 10-year yield has fallen 46 basis points, which is on track for its biggest single-month drop since December 2008 when it fell 70 basis points, according to Reuters data.
Doubts remain on the long-term prospects for weaker euro zone nations such as Greece, Spain and Portugal even after authorities came up with a $1 trillion rescue package. Europe's sovereign debt crisis has fanned concerns of its toll on global growth and revived talk of deflation.
The euro fell broadly, losing 13.6 percent against the dollar so far this year. For more, see [FRX/]
The Dow and the S&P 500 indexes fell, although the Nasdaq was up modestly on gains from Apple Inc and Google Inc. [.N]
HOUSING WORRIES LINGER
Europe's debt problem has weighed down investor sentiment, overriding recent data that signaled the U.S. economic recovery, albeit fragile, is still intact.
The National Association of Realtors said home resales grew at a faster-than-expected 5.77 million unit pace in April. But traders shrugged off the data on the view that the spike reflected a late rush ahead of the expiration of a federal home buyer tax credit at the end of April. [ID:nN24249842]
"This particular set of data has been regarded as yesterday's news. You are just waiting for the next shoe to drop to see how bad the sales will be in May," LPL's Canally said.
Signs of housing weakness in the absence of government stimulus could intensify worries about the U.S. recovery and propel a further decline in Treasury yields.
In the short term, however, lower yields will help hold down public and private loan costs, as the government continues to borrow heavily to finance a huge deficit due to its stimulus programs and a shortfall in tax receipts.
The Treasury will sell $42 billion of two-year notes on Tuesday; $40 billion of five-year debt on Wednesday and $31 billion of seven-year notes on Thursday. The combined sales of these maturities are $5 billion less than a month earlier.
In the "when-issued" market, traders anticipate the new two-year notes US2YTWI=TWEB would yield 0.778 percent midday Monday. This compared with a high yield of 1.02 percent set at the April auction.
In the open market, the yield on the two-year notes US2YT=RR sold in April last traded at 0.74 percent, down 2 basis points from late Friday.
The gap between two-year and 10-year yields, which has narrowed on the perception of slowing U.S. growth, shrank to 2.46 percentage points, a level not seen in seven months. (Reporting by Richard Leong; Editing by Kenneth Barry)