TREASURIES-Bonds gain in safety bid on bailout uncertainty

*Uncertainty drives safety bid in government debt

*Even after Senate passage, House could nix rescue plan

*Bonds add to gains after weekly jobless claims

*Rate futures increase chances of deep October Fed cut

NEW YORK, Oct 2 (Reuters) - U.S. Treasury debt prices rose on Thursday in a safe haven bid, even after the U.S. Senate passed a financial sector rescue plan, as investors remained uncertain whether the House of Representatives would follow suit.

Many analysts now warn that although the $700 billion rescue package is not the panacea that frozen credit markets and battered stocks need, and that it may take time for it to help the embattled global economy, riskier assets could spiral into a steeper selloff if there was not even a partial fix.

Investors' concerns about such dangers buoyed safe harbor government securities prices on Thursday.

"Treasuries right now might be akin to the VIX," said Doug Bender, managing director with McQueen, Ball & Associates in Bethlehem, Pennsylvania, referring to an index of stock market volatility.

"I don't think anyone would argue there is great value in Treasuries as the ultimate safety refuge: they are more a gauge of fear than value," he said.

The benchmark 10-year Treasury note's price, which moves inversely to its yield, rose 7/32 for a yield of 3.71 percent US10YT=RR, versus 3.74 percent late Wednesday.

Treasuries briefly added to gains after U.S. weekly initial jobless claims came in higher than expected, underscoring the deterioration of the labor market on the eve of the government's widely watched monthly non-farm payrolls report.

"People who are already laid off are having a hard time finding a job," said Dana Saporta, economist with Dresdner Kleinwort Securities LLC in New York. "Today's report shows the U.S. labor market is deteriorating," Saporta said.

As market participants weighed the growing risks that the tightening 14-month old global credit squeeze could push the United States and other major economies into a deep recession, U.S. short term interest rate futures showed an increase in the implied chances of a large Federal Reserve rate cut later this month.

Short term interest rate futures raised the perceived chance of a 50 basis-point cut in the fed funds target rate by the late October policy meeting to about a 70 percent chance on Thursday from about 64 percent early on Wednesday.

Shorter government debt maturities respond closely to expectations for official central bank interest rate moves, as well as tapping a safety bid from investors fleeing riskier assets.

The 2-year Treasury note's price was up 4/32 for a yield of 1.76 percent US2YT=RR, versus 1.82 percent late Wednesday.

U.S. stock futures were pointing to a lower start.

Although the Senate passed the Bush administration's $700 billion rescue package for U.S. financial institutions late on Wednesday, the House of Representatives, which rejected the bill on Monday, has to vote on it again, probably on Friday.

Driving much of the flow into safe harbor Treasuries were extreme dislocations in interbank lending markets. Banks are becoming almost exclusively dependent on global central banks to provide short term funding -- a situation which is driving investors into safe haven assets.

"The stress in short term funding markets is beyond critical," said Bender. "There is still a lot of distrust. The central banks are providing stability," he said, but added that if the U.S. bailout package does pass into law "it will free up some of the institutions."

Looming year-end funding pressures are already adding to the extraordinary stress in money markets, ramping up 3-month lending rates to extreme levels.

Three-month dollar Libor USD3MFSR= rose to 5.31750 percent, the highest since January, up from 4.15000 percent on Wednesday. The euro-zone equivalent for euros hit its highest since the launch of the single currency, at 5.31750 percent EUR3MFSR=.

The 30-year Treasury bond rose 23/32 in price for a yield of 4.18 percent US30YT=RR, versus 4.22 percent late Wednesday. (Reporting by John Parry; Additional reporting by Richard Leong, Editing by Chizu Nomiyama)