TREASURIES-Bonds gain on safety bid amid bank worries

* Bonds up in safe-haven bidding as banks lead stocks down

* Banking fears overshadow governments GSE rescue plan

* Credit worries reduce chance the Fed will raise rates (Adds economists' comments, updates prices; changes byline)

By Chris Reese

NEW YORK, July 14 (Reuters) - U.S. Treasury debt prices climbed on Monday in renewed safe-haven bidding as renewed concerns about the banking sector hit stocks and cut expectations the Fed will raise interest rates any time soon.

Fears about the banking system overshadowed a government rescue plan for mortgage finance companies Fannie Mae (FNM.N) and Freddie Mac (FRE.N) announced on Sunday, and whetted investors' appetite for safe-haven U.S. government securities.

On Friday, IndyMac Bank IMB.N suffered a run on its deposits, resulting in the third-largest bank failure in U.S. history and adding to fears about bank stability and the future of the mortgage market. Financial shares were led lower on Monday by big drops in stocks of National City Corp NCC.N, a U.S. Midwest regional bank, and Washington Mutual (WM.N).

Any optimism that the worst might be over for financial companies after J.P. Morgan's Federal Reserve-funded buyout of Bear Stearns in March has now pretty much gone out the window.

"With the banking system facing a looming funding crisis and the credit crunch for the real economy only just getting under way, the Bear Stearns affair increasingly looks as marking the end of the beginning of the credit crunch rather than the beginning of the end that it was initially taken for," said Richard Iley, senior economist at BNP Paribas in New York.

The search for a safe-haven investment gave bonds a boost, with the benchmark 10-year Treasury note US10YT=RR trading 29/32 higher in price for a yield of 3.86 percent from 3.97 percent late on Friday, for the biggest single-day fall in benchmark yields in over a month. Two-year notes US2YT=RR were up 9/32 for a yield of 2.46 percent from 2.62 percent.

"The (financial sector) crisis has not been resolved: there are clearly more shoes to drop," said John Canavan, market analyst at Stone & McCarthy in Princeton, New Jersey. "That means a significant, continued safe-haven bid for Treasuries."

The Treasuries rally partially reversed Friday's sell-off, which occurred after The New York Times said officials were mulling a plan to back government-sponsored mortgage giants Fannie Mae and Freddie Mac if their problems worsened and Reuters reported they would be able to take advantage of the Fed's emergency discount window for short-term lending.

"Fixed income markets shudder once again as Fannie and Freddie need a bailout of their own, and the stability of the financial system once again comes under suspicion," said Scott Anderson, senior economist at Wells Fargo Bank in Minneapolis.

The continued challenges to the financial system also made it much less likely that the Fed, the U.S. central bank, would raise benchmark interest rates any time soon, keeping the cost of financing investment positions steady.

Short-term interest rate futures see a negligible chance of a Fed rate hike in August and a rate hike is no longer fully priced in until the December meeting of the Fed's Federal Open Market Committee. As recently as Friday futures had strongly pointed to an expected October rate increase.

"The rescue (of Fannie Mae and Freddie Mac) just underscores how serious the credit market stresses are and we may be rebuilding a renewed preference for safety and liquidity," said William Sullivan, chief economist at JVB Financial Group in Boca Raton, Florida.

Five-year Treasury notes US5YT=RR traded 18/32 higher in price for a yield of 3.17 percent from 3.29 percent late on Friday, while the 30-year bond US30YT=RR was 1-18/32 higher in price to yield 4.45 percent from 4.55 percent. (Additional reporting by Ellen Freilich; Editing by James Dalgleish)