TREASURIES-Slip in Asia on JGBs, ISM factory data eyed

* Losses in JGBs, rise in Nikkei hit Treasuries

* Concerns on finance sector limit bond selling

* June ISM manufacturing index expected to have dipped

By Rika Otsuka

TOKYO, July 1 (Reuters) - U.S. Treasuries slid in Asia on Tuesday as a steep fall in Japanese government bonds and a rise in Tokyo stocks prompted investors to trim their bond holdings.

But losses were limited as more traders bet economic weakness and concerns about the financial sector will prevent the Federal Reserve from lifting interest rates in the near future.

"A rise in Treasury yields has been capped as the market focuses its attention on the slower economy," said a senior trader at a Japanese brokerage.

For a clue on whether the world's biggest economy is in a recession, investors will look to the Institute for Supply Management's index of factory activity at 1400 GMT.

Economists in a Reuters survey forecast the index will dip to 48.6 in June from 49.6 in May. A reading below 50 represents contraction, and if June shows a continued pullback that would mark the sixth month of retrenchment in seven months. The benchmark 10-year Treasury note fell 5/32 in price to yield 3.998 percent US10YT=RR, up 2 basis points from late U.S. trading on Monday.

The two-year note, the sector most sensitive to changes in the outlook for monetary policy, edged down 2/32 in price to yield 2.665 percent US2YT=RR, up 3 basis points.

Treasuries finished their worst quarter in four years on Monday amid mounting global inflation pressures, with oil relentlessly rising. Speculation that the Fed may have to aggressively boost interest rates to contain inflation had mounted, sparking a sharp bond sell-off in April-June.

The two-year yield rose more than 1 full percentage point in the second quarter, while the benchmark 10-year yield jumped some 55 basis points.

But the Treasury market found its floor late in the second quarter on recent reports showing weak economic growth and rising worries about a second wave of write-downs of bank losses stemming from mortgage-linked investments and the credit crunch.

U.S. short-term interest rate futures show the market is pricing in around a 30 percent chance of the Fed raising rates to 2.25 percent by its policy meeting in October. Interest rate futures imply a federal funds rate of roughly 2.45 percent by the year-end, up from 2.00 percent now. FEDWATCH

JGBs plunged on Tuesday after the Bank of Japan's tankan survey showed that business sentiment worsened less than expected in the past three months. [JP/]

The tankan helped lift Tokyo's Nikkei share average .N225 by midday. [.T] (Editing by Michael Watson)