TREASURIES-Bonds dip after jobs report: eye bailout

*Biggest monthly U.S. payrolls drop since March 2003

*But bailout focus overshadows weak jobs report

*Stock futures rise on Wachovia deal, bailout hopes

NEW YORK, Oct 3 (Reuters) - Short-dated U.S. Treasury debt prices slipped on Friday, after a weak jobs report appeared to put more pressure on lawmakers in Washington to pass a rescue package for the U.S. financial system, hopes of which bolstered stock market sentiment and capped Treasuries.

Trade in government bonds was erratic, as investors perceived the labor market data as underscoring that the economy was succumbing to the most severe global credit crisis since the Great Depression: a prospect that over time is likely to bolster bids for Treasuries.

For the moment, as some investors returned to the stock market on hopes of a bailout and after Wells Fargo (WFC.N) agreed to acquire embattled bank Wachovia Corp. WB.N, flows went to equities from short maturity government securities, pushing the latter's prices lower.

The 2-year Treasury note's price, which moves inversely to its yield, was down 5/32 for a yield of 1.70 percent US2YT=RR, versus 1.62 percent before the report and versus 1.62 percent late Thursday.

U.S. government bonds traded choppily in the aftermath of the report, with market participants unlikely to make major directional bets before the fate of the bailout package was known, analysts said.

Treasuries' seesaw moves after the payrolls report were "all kneejerk responses to the data and also there is the focus on a vote on the bailout package on Capitol Hill later in the day," said William Sullivan, chief economist at JVB Financial Group in Boca Raton, Florida.

U.S. September non-farm payroll jobs decreased by 159,000 in September, much more than economists' median forecast for a loss of 100,000 jobs and the biggest monthly decline since March 2003. The jobless rate was steady from the month before at 6.1 percent due to a decrease in the workforce. But economists expected the labor market to continue to deteriorate.

"Credit market stresses are beginning to impact the labor markets. We may be dealing with even weaker job figures later this year or into 2009," Sullivan said.

The benchmark 10-year Treasury note's price, which moves inversely to its yield, slipped 3/32 for a yield of 3.64 percent US10YT=RR, versus 3.57 percent shortly before the report and versus 3.63 percent late Thursday.

After the U.S. employment report, short term U.S. rate futures continued to fully price a 50 basis point Federal Reserve rate cut later this month. The paralyzed state of lending markets remains a major risk for the economy that will likely force the Fed to act, analysts said.

"If we get a rate cut in October, it's not because of employment. It will be a response to the money markets," said Christopher Low, chief economist with FTN Financial in New York.

The 30-year Treasury bond was up 21/32 in price for a yield of 4.12 percent US30YT=RR, versus 4.07 percent before the report and versus 4.15 percent late Thursday.

(Reporting by John Parry; Additional reporting by Richard Leong, Editing by Chizu Nomiyama)