* Obama, congressional leaders due to hold budget talks * Benchmark Treasury yields hold just above 10-week low * US industrial production falls unexpectedly in October By Chris Reese NEW YORK, Nov 16 (Reuters) - U.S. Treasury debt prices rose slightly on Friday, with yields near two-month lows on investor skepticism that budget talks aimed at preventing large-scale automatic fiscal tightening will be immediately successful. The "fiscal cliff" that the United States is trying to avoid amounts to about $600 billon of tax increases and spending cuts that would automatically come into force early next year if Congress fails to agree on less-extreme measures. Investors are afraid the spending cuts and tax increases will push the U.S. economy back into recession. Newly re-elected President Barack Obama and congressional leaders were due to hold budget talks on Friday. Democrat Obama advocates raising taxes for wealthy Americans while Republicans oppose any tax hikes. "The markets will remain cautious into today's congressional budget negotiations and ahead of the weekend," said Michael Englund, chief economist at Action Economics in Boulder, Colorado, adding "we doubt we'll hear anything constructive from lawmakers." The Wall Street Journal reported on Friday that White House officials were in advanced internal discussions that could indicate increased flexibility to negotiate on the potential budget crisis. Citing sources familiar with the matter, the Journal said officials were in talks to replace spending cuts set to begin in January with a separate package of spending cuts and tax increases. The White House had no comment on the report. Benchmark 10-year Treasury notes were trading 3/32 higher in price to yield 1.58 percent, down from 1.59 percent late Thursday and not far off a 10-week low of 1.57 percent touched on Tuesday. The bullish tone in Treasuries was supported by data showing U.S. industrial output unexpectedly fell in October as superstorm Sandy disrupted production, although the underlying tone of the report remained consistent with slowing manufacturing activity. "The bond market rallied a tiny bit around the time of the industrial production report, but what limited the market's reaction was the statement the Fed put out saying the distortion from superstorm Sandy was massive," said Michael Cloherty, head of U.S. rates strategy at RBC Capital Markets LLC in New York. "So that reduces the informational content of the report from the perspective of using it to forecast what is likely to happen in the rest of the quarter," he said. Outside of U.S. fiscal negotiations, investors are also watching developments in Greece. Its international lenders are squabbling over how to fix its long-term debt sustainability, delaying an aid payment Athens needs to stay afloat. The safe-haven appeal of U.S. government debt was also underpinned on Friday by worries over a possible escalation of violence in the Middle East after Israeli attacks in the Gaza Strip intended to end militant rocket fire at Israel.