* Investor "shorts" highest since late October
* Rock-bottom yields reduce Treasuries' appeal
* U.S. to sell $66 billion in debt this week
* Fed seen pursuing more bond purchases to help economy
NEW YORK, Dec 11 More investors turned bearish on U.S. Treasuries in the latest week ahead of $66 billion in federal debt supply and the Federal Reserve's two-day policy meeting, a survey released on Tuesday showed.
Investors typically reduce their bond holdings to make room for new supply. While the likelihood the Fed will keep buying Treasuries to support the U.S. economy is bond-friendly, their rock-bottom yields lessen Treasuries' appeal as long-term investments, analysts said.
The share of investors who were "short", or holding less Treasuries than their benchmarks, on Monday rose to 19 percent from 17 percent the previous week, J.P. Morgan Securities said in its weekly Treasury client survey.
This was the highest level of "shorts" since Oct. 22 and above its four-week average of 16 percent and 52-week average of 15 percent, J.P. Morgan said.
The share of investors who said on Monday they were "long" Treasuries, or holding more government debt than their portfolio benchmarks, also rose to 15 percent from 13 percent in the prior week.
Anxiety about the absence of a U.S. budget deal has provided support for Treasuries. On the euro crisis front, the surprise news that Italian Prime Minister Mario Monti was stepping down also renewed some safe-haven bids for bonds since the weekend, analysts said.
The share of investors surveyed who said they were "neutral" on U.S. government debt, or holding Treasuries equal to their portfolio benchmarks, fell to 66 percent from 70 percent last week.
Most investors remained cautious after the U.S. presidential election last month on worries about a protracted and contentious negotiation on a budget deal between President Barack Obama and top Republican lawmakers.
If they fail to reach a pact before year-end, a fiscal contraction, through a combination of automatic tax hikes and spending cuts worth $600 billion dubbed the "fiscal cliff," will phase in next year. Economists have warned this would likely cause a U.S. recession.
On Tuesday, the yield on benchmark 10-year Treasury notes was 1.656 percent, up 3.8 basis points from late on Monday and up 6.5 basis points from a week earlier.
The U.S. Treasury will sell $32 billion in three-year notes at 1 p.m. (1800 GMT), part of this week's $66 billion in longer-dated government debt supply.
It will sell $19 billion in 10-year notes on Wednesday and $13 billion in 30-year bonds on Thursday.
Meanwhile, the U.S. central bank is expected to renew outright purchases of Treasuries in early 2013 after the expiration of its "Operation Twist" at year-end.
While there were modest changes in overall Treasuries positions in the latest week, active clients, including market makers and hedge funds, who are viewed as taking on speculative bets in Treasuries, reduced their bond positions.
The share of shorts among active traders rose to 31 percent from 23 percent in the latest week. The share of neutrals fell to 61 percent from 69 percent while the share of longs was unchanged at 8 percent.