TREASURIES-Bonds soar as global crisis spurs safety bids

* Bonds fly higher on safety bid as global equities fall * European bank turmoil gives Treasuries an early boost * Gains pared briefly as emergency rate-cut forecasts dashed (Adds analysts' quotes, updates prices)

By Chris Reese

NEW YORK, Oct 6 (Reuters) - U.S. Treasuries surged on Monday with investors snapping up lower-risk debt as worries over the spreading global credit crisis and slowing economic growth slammed stock markets around the world.

The Dow Jones industrial average .DJI slid 4.5 percent at midday on Monday, following in the footsteps of a sharp drop in Asian stock markets and a fall of 8 percent in major European equity indexes. Many investors fleeing stocks turned to Treasuries, and the benchmark 10-year Treasury note gained over a full point in price.

"It's a storm of risk aversion, with stocks down hugely and Treasuries being the one safe market that people continue to pour their cash into," said William O'Donnell, head of U.S. interest-rate strategy at UBS Securities LLC in Stamford, Connecticut.

Earlier in the session, the Dow dove over 500 points to below 10,000 for the first time since October 2004. At its session low of 9,738.30, the blue-chip Dow average was down 5.69 percent from Friday's close.

European stocks plunged on Monday after several governments moved to extend guarantees on bank deposits as banks struggled to survive.

The drop in stocks and surge in bonds comes on the heels of U.S. approval of a $700 billion program on Friday intended to free up short-term lending and derail a global recession.

"What is implied is that the market thinks this bailout plan is too late to save global industrialized countries from recession," O'Donnell said, adding that the drop in bond yields puts increasing pressure on the Federal Reserve to cut interest rates.

The benchmark 10-year U.S. Treasury note US10YT=RR jumped 1-1/32 in price for a yield of 3.48 percent, down from 3.60 percent late on Friday, while the 2-year note US2YT=RR gained 9/32 for a yield of 1.44 percent, down from 1.59 percent at Friday's close.

"Flight to quality is in full force," said Andrew Brenner, senior vice president at MF Global in New York.

Early in the day, Treasuries pared gains briefly after the Federal Reserve said it will begin to pay interest on banks' required excess reserve balances.

Some traders had been expecting the Fed to announce an emergency interest-rate cut, but when that didn't happen, bonds briefly lost some of their bid.

"We saw the Fed announce that it is planning various further options to increase liquidity ... so the markets assumed that means that the Fed probably is not going to be cutting rates any time soon," said Kim Rupert, managing director of global fixed-income analysis for Action Economics in San Francisco.

The Treasury also announced on Monday morning that it would increase the size of its debt securities auctions in an effort to free up the short-term lending market.

The five-year Treasury note US5YT=RR shot up 24/32 in price for a yield of 2.47 percent, down from 2.63 percent late on Friday.

The 30-year bond US30YT=RR soared over 2 full points -- rising 2-8/32 in price for a yield of 3.96 percent, down from 4.08 percent late on Friday. (Reporting by Chris Reese; Editing by Jan Paschal )