* U.S. retail sales unexpectedly drop for second month in three * U.S. producer prices record biggest drop in 10 months * Cyprus bailout worries rise again By Luciana Lopez NEW YORK, April 12 (Reuters) - Prices for U.S. Treasuries rose on Friday as disappointing data again underscored the potential for weakness in the U.S. economy, with worries about a bailout for euro zone member Cyprus adding to investor nervousness. U.S. retail sales contracted in March for the second time in three months, a sign the American economy may have stumbled at the end of the first quarter. The 0.4 percent drop exceeded analysts' expectations that sales would be flat. Prices for Treasuries rose after the data, with the 30-year bond gaining more than one full point. In addition, U.S. producer prices dropped the most in 10 months in March as the cost of gasoline tumbled. "A combination of soft activity and extremely benign inflation data is a good signal for U.S. Treasuries, which are poised to rally on these and similar data over the coming months," said Rob Carnell, chief international economist at ING Bank. "A return to talk about downscaling of Fed QE (quantitative easing) does not look imminent until this soft patch is past - which we think will be by mid-year." Until then, he added, "the domestic and international environment is very bond supportive." Analysts fretted that future retail sales figures could be weak, as well. "The worry is the full reaction to the expiration of the payroll tax cut and to the sequester budget cuts won't be evident until sometime this quarter," said Cary Leahey, senior advisor at Decision Economics. Nor was news from across the Atlantic more soothing to investors. Cypriot President Nicos Anastasiades told reporters in Nicosia on Friday that he would send a letter to European Commission President Jose Manuel Barroso and European Council President Herman Van Rompuy seeking extra assistance for Cyprus, given the bad economic situation of the island. Euro zone finance ministers said, however, there were no plans or requests beyond the 10 billion euros of loans already on the table. The 10-year note last traded up 15/32 to yield 1.741 percent, compared with 1.7913 percent late on Thursday. The 30-year bond last traded up 1-06/32 to yield 2.938 percent, compared with 2.9968 percent late on Thursday. Adding to support for Treasuries are expectations that Japanese investors will buy U.S. government debt on the Bank of Japan's $1.4 trillion stimulus program. The BOJ program helped set off last week's Treasuries rally as traders bet Japanese banks, insurers and pension banks would increase their purchases of Treasuries and other higher-yielding foreign bonds. While the expected surge has not materialized, but analysts said the money could still flow in over time. Nevertheless, yields could resume their advance later this year if the U.S. economy picks up steam, which could in turn prompt the Federal Reserve to pare back or even end its $85 billion-per-month buying of Treasuries and mortgage-backed securities. Policymakers have sent mixed signals recently over when the central bank might slow or stop the stimulus program, meant to prop up the labor market. Investors are now trying to gauge when a consensus could emerge at the Fed on tapering its asset purchases.