* Eurogroup official comments spur worries over banks * Benchmark yields briefly rise to levels before Cyprus crisis * U.S. to sell $99 billion coupon-bearing supply * U.S. Fed buys $1.46 bln bln bonds due 2036 to 2043 * Quarter-end buying seen limiting bond market decline By Richard Leong NEW YORK, March 25 U.S. government debt prices rose on Monday on fears a bailout deal for Cyprus might become a threat to the euro zone banking system rather than the solution traders hoped for. While Cyprus's bailout overnight calmed some fears about the festering euro zone debt crisis, traders remained wary about fiscal problems in Spain and Italy whose economies and banking systems are many times larger than the banking system in Cyprus. Comments from the head of the Eurogroup of euro finance ministers on Monday stoked fears that depositors with Spanish and Italian banks with accounts above 100,000 euros will withdraw their money, causing runs at those banks and disrupting the region's banking system. "There's fear they are going after the depositors. The market thinks this is the wrong approach. This could cause a significant problem for banks," Larry Milstein, head of government and agency trading at R.W. Pressprich & Co. in New York. Dutch Finance Minister Jereon Dijsselbloem, who heads the minister group, told Reuters and the Financial Times the "bail-in" approach for Cypriot banks might be a blueprint for the banking sectors of other stuggling euro zone members. Cyprus reached an agreement this weekend with international lenders to secure a 10 billion euro ($13 billion) bailout before the European Central Bank cut off support for the island nation. The move briefly reduced anxiety that Cyprus' fiscal woes will ripple across the euro zone, but traders' focus turned to the longer-term implication of the Cyprus deal that involved up to 4.2 billion in losses for large depositors. "This is another palliative move, but they haven't fixed their long-term problems," Lacy Hunt, executive vice president at Hoisington Investment Management Co. in Austin said of the Cyprus deal. Dijisselbloem's comments hurt U.S. and European stock prices especially bank shares and pushed up the yields on Italian debt. This sparked bids for U.S. and German government bonds. Benchmark 10-year Treasury notes traded up 3/32 in price for a yield of 1.916 percent, down 1.1 basis points from late on Friday. The 30-year bond rose 6/32 in price, yielding 3.140 percent, down 1.0 basis point from Friday. Longer-dated Treasury yields briefly retraced to levels seen a week ago when Cyprus' troubles erupted and ignited a wave of buying in bonds, gold and other perceived low-risk assets. SUPPLY IN SHORTENED WEEK The week's $99 billion in longer-dated Treasury supply and any encouraging domestic economic data should exert some downward pressure on the bond prices with moves exaggerated by a shortened trading week ahead of the Easter holiday, analysts and traders said. The U.S. Treasury Department will kick off the week's supply with a $35 billion auction of two-year notes on Tuesday; a $35 billion sale of five-year debt on Wednesday and $29 billion auction of seven-year notes on Thursday. The U.S. bond market will close at 2 p.m. (1800 GMT) on Thursday and shut for the Good Friday holiday. Supply-related selling should be mitigated by buying from fund managers for quarter-end rebalancing and four purchase operations from the Federal Reserve this week, analysts said. The U.S. central bank bought $1.46 billion in government debt due in Feb. 2036 to Feb. 2043 at 11 a.m.. Moreover, the Fed's affirmation of its commitment to hold short-term interest rates near zero after its policy meeting last week will limit the rise in Treasury yields. "Status quo will reign over the next few months," said Tom Graff, portfolio manager at Brown Advisory in Baltimore.