TREASURIES-Rally on safe-haven rush, new Fed moves

* Yields dive as spooked investors seek safety

* Lehman reported heading for bankruptcy

* Fed said to expand range of collateral for repo

SYDNEY, Sept 15 (Reuters) - U.S. Treasury yields hit five-month lows on Monday and Eurodollars surged as concerns about the stability of the U.S. financial system sparked a rush from risk and fresh liquidity steps from the Federal Reserve.

Reports that Lehman Brothers Holdings LEH.N would be put into bankruptcy shook confidence and sent investors rushing for the perceived safety of sovereign debt.

The Fed responded by widening the array of securities it takes as collateral for loans while increasing its term securities lending facility by $25 billion to $200 billion. That was just the latest in a string of measures aimed at easing a liquidity logjam in interbank markets.

"These changes represent a significant broadening in the collateral accepted under both programs and should enhance the effectiveness of these facilities in supporting the liquidity of primary dealers and financial markets more generally," the Fed said in a statement.

For the full text of the statement, double click on [nN14779279].

Two-year Treasury notes US2YT=RR jumped 16/32 in price, driving yields down to 1.95 percent, from 2.22 percent late in New York on Friday. Yields on 10-year notes US10YT=RR dropped to 3.56 percent on Monday, from 3.72 percent on Friday.

"It's a pure flight to quality right now," said Adam Donaldson, head debt strategist at Australia's Commonwealth Bank.

"The big concern is how Lehman and other banks unwind their credit default contracts," he added. "Nobody knows how that will play out."

Bill Gross, head of bond fund Pimco, warned of a "tsunami" as derivative and swap-related positions were unwound worldwide (see [nN14655488]).

The Fed holds a policy meeting on Tuesday and traders were even talking about the prospect for a cut in interest rates, if not this week then by year-end.

As a result, three-month Eurodollars shot higher across the curve <0#ED:>. The December contract jumped 0.805 to 97.245 and March next year climbed 0.260 to 97.445.

December Fed fund futures <0#FF:> rose 0.14 to 98.225, implying a rate of 1.775 percent compared to the current funds rate of 2.0 percent.

Five-year Treasury notes US5YT=RR were trading 1-1/32 higher in price for a yield of 2.73 percent, down from 2.96 percent on Friday.

The 30-year bond US30YT=RR rose 1-15/32 for a yield of 4.23 percent, from 4.32 percent on Thursday. (Reporting by Wayne Cole; Editing by Jonathan Standing)