TREASURIES-U.S. bonds gain ground after auction

* Seven-year note auction draws strong demand

* Home sales, spending, jobless claims beat expectations

* Durable goods orders unexpectedly fall in October

* Dubai asks for debt standstill to restructure Dubai World (Updates prices)

By Emily Flitter

NEW YORK, Nov 25 (Reuters) - U.S. Treasury debt prices rose on Wednesday as strong demand in an auction of seven-year notes outweighed positive economic data that initially sent investors fleeing government debt.

The results of Wednesday's $32 billion auction, which capped a week of new issuance totaling $118 billion, indicated vigorous bidding from both indirect and direct bidders. Auctions of two- and five-year notes earlier in the week also brought strong results.

"We had the market trying to beat up Treasuries a little bit in advance of the auction, but the seven-year auction went very well and we rallied afterward," said David Coard, head of fixed income sales and trading at Williams Capital Group in New York. "We got through $118 billion of Treasuries with our heads held high."

Despite the record supply and the shortened holiday week, Treasury prices resisted pressure, as investors judged the U.S. bond market favorably against a backdrop of skittishness about sovereign debt elsewhere.

In Dubai, the government said it would ask creditors of its two flagship firms for a debt standstill while it restructures the Dubai World group. U.S. credit agencies downgraded several government-affiliated entities later in the day. For details, see [ID:nGEE5AO2L1].

"As we approach the end of the year, there is more of a movement away from risk and into safer securities, obviously with Treasuries being paramount," Coard said.

The data showed gains in new home sales in October, suggesting some stabilization in the housing market. A drop in weekly jobless claims, along with a higher-than-expected increase in consumer spending in October, added to the picture of economic recovery. [ID:nN25346193].

But the numbers were accompanied by data showing an unexpected fall in new orders for long-lasting U.S. manufactured goods in October, which undermined some expectations the factory sector would lead a recovery.

Benchmark 10-year Treasury notes US10YT=RR were trading 11/32 higher in price to yield 3.27 percent, down from 3.31 percent late on Tuesday, while the 30-year Treasury bond US30YT=RR was 14/32 higher to yield 4.23 percent from 4.25 percent.

The number of U.S. workers filing new applications for jobless insurance tumbled last week by a surprisingly large amount to the lowest level in more than a year, according to government data. [ID:nN25346193].

Jobless "claims were under 500,000 and so this is bond bearish," said David Ader, head of government bond strategy at CRT Capital Group in Stamford, Connecticut. He added, however, "There is a real mix of information here that leaves us feeling rather neutral about the data to seeing it as a tad soft."

Treasury trade volumes were said to be very thin ahead of the U.S. Thanksgiving Day holiday on Thursday. (Additional reporting by Chris Reese, Editing by Kenneth Barry) ((emily.flitter@thomsonreuters.com; +1 646 223 6310; Reuters Messaging: emily.flitter.reuters.com@reuters.net))