TREASURIES-U.S. Treasuries extend gains on European bank worries

* Treasuries extend gains as Europe banking woes worsen * Solid response to 3-year auction provides more boost

* Eyes on Fed's next easing move amid patchy data

By Umesh Desai

HONG KONG, Sept 8 (Reuters) - U.S. Treasuries rose for the second straight day on Wednesday on renewed concerns about the health of the European banking system, and as markets pondered about further easing moves by the Federal Reserve.

Following on a Wall Street Journal report on Tuesday highlighting the weakness of July's bank stress tests, Ireland's extension of guarantees for short-term banking liabilities added to jitters about the European banking sector. [ID:nLDE6861YN]

The December futures on the 10-year note TYv1 rose 8/32 to 125-03/32, pulling further away from a one-month low struck on Friday.

The worries about Europe's banks also drove down stock markets in Asia and put the euro on the defensive. [MKTS/GLOB]

"Sovereign risk is a euro-centric issue and that is driving Treasuries," said Thomas Lam, group chief economist with DMG & Partners Securities in Singapore.

"Markets are undecided whether the Fed will embark on additional policy easing. If the economy weakens further and the cost to additional policy action is lower, then the Fed is more inclined to expand its balance sheet by buying more securities."

Gains were also supported by strong bids at the first of this week's three bond offerings totaling $67 billion.

Tuesday's three-year auction produced a record-low yield, with the sale attracting bids worth 3.21 times the amount on offer, indicating investors were willing to pay a small premium to get the bonds.

The Treasury sells $21 billion in reopened 10-year notes on Wednesday and $13 billion in reopened 30-year bonds on Thursday.

The benchmark 10-year note US10YT=RR was 5/32 higher in price, yielding nearly 2 bps lower at 2.58 percent.

The two-year note US2YT=RR was almost one basis point lower at a yield of 0.48 percent.

The 30-year bond rose 10.5/32 in price to yield 3.6465 percent.

While analysts are almost certain the Fed will ease again in the event of a further economic slowdown, some doubted there was much more room for yields to fall.

"(It is) hard to imagine U.S. yields going much lower, and even if they do in the short term it is very hard to envision they stay there over the medium term given massive fiscal deficits," said Michael Hasenstab, Franklin Templeton's co-director of international bonds on Wednesday.

Hasenstab, who oversees $80 billion of the group's total assets of $234 billion, made these comments in the Dealing Room, a Reuters messaging chatroom. (Editing by Kim Coghill)