TREASURIES-Climb in Asia as stocks fall

* Nikkei falls 2.7 pct, S&P 500 futures slip 0.8 pct

* Bargain-hunting kicks in as 10-year yield nears 4.0 pct

By Rika Otsuka

TOKYO, Oct 31 (Reuters) - U.S. Treasuries climbed in Asia on Friday as falling regional share prices prompted investors to shift their money to safe-haven government bonds from equities.

Traders said investors hunted for bargains as the benchmark 10-year Treasury yield approached the psychologically key 4.0 percent level the previous day on a stock rally and expectations of a raft of new debt supply.

Many market players say the 10-year yield is unlikely to rise sharply above that level as economic data have been showing signs of persistent deterioration in the U.S. economy.

"The 10-year yield could try its peak hit around 4.1 percent earlier this month due to supply concerns. But that would be it as few believe the U.S. economy will show an improvement soon," said a senior trader at a Japanese brokerage.

Benchmark 10-year Treasury notes US10YT=RR rose 7/32 in price to yield 3.94 percent, down 3 basis points from late U.S. trade.

Two-year Treasury notes US2YT=RR edged up 1/32 in price to yield 1.55 percent, down 2 basis points.

December 10-year futures TYv1 climbed 7/32 to 113-25.5/32.

Tokyo's Nikkei share average .N225 was down 2.7 percent by midday.

S&P 500 index futures SPc1 slipped 0.8 percent.

Data on Thursday showed the economy shrank at a 0.3 percent annual rate in the third quarter, suffering its sharpest contraction in seven years, as consumers cut spending and businesses reduced investment at the onset of what may be a severe and long-lasting recession. [ID:nN30534111]

On Wednesday, the Federal Reserve cut interest rates by 50 basis points to 1.0 percent to combat the widening credit crisis that has been damaging the economy.

Bond investors continued to mull the prospects for more Fed interest rate cuts and initiatives to pump unprecedented extra amounts of liquidity into the global banking system.

The Bank of Japan is expected to consider cutting interest rates from the current 0.5 percent at Friday's policy meeting, joining the global credit easing.

Traders said a BOJ rate cut is unlikely to have a direct impact on Treasuries.

But if the BOJ decides to keep interest rates on hold, that would spark a stock sell-off as investors would take such an action as a sign that the BOJ is less aggressive in combatting financial woes than others.

A fall in stocks is likely to help Treasuries, traders said. (Reporting by Rika Otsuka; Editing by Chris Gallagher)