* Slip in Asia after huge flight-to-quality buying
* Asia stocks shed 2-4 pct, trim losses after Wall St plunge
* Stock plunge raises hope $700 bln bailout will be revived
* Investors eye some form of bailout to help battered markets
TOKYO, Sept 30 (Reuters) - U.S. Treasuries edged lower in tense Asian trade on Tuesday, giving back just some of the huge gains made the previous day when equities plunged and investors fled for safety following the surprise vote against the $700 billion U.S. bailout plan.
Two-year notes US2YT=RR fell 8/32 in price, lifting their yield 13 basis points to 1.761 percent from late in New York following the massive 46 basis point drop on Monday.
Yields on the 10-year note US10YT=RR edged up 4 basis points to 3.620 percent but were still down 23 basis points for the week.
The huge steepening of the yield curve came after the House of Representatives voted 228-205 against a compromise bailout plan that would have allowed the Treasury Department to buy up toxic assets from struggling banks.
“Apocalyptic talk should be avoided,” said Peter Pontikis, a Treasury strategist at Suncorp Metway.
“But the markets are sending a clear message of the need for a U.S. government scheme of administration of its banking system soon -- anything short of this is not an option. Unwarranted delays will merely prolong the time frame of an eventual U.S. recovery.”
Equity markets in Asia also suffered. Japan's Nikkei average was down 3 percent .N225 but had slid nearly 5 percent at one point. Other indexes dropped 2-4 percent.
A trader at a Japanese trust bank said the plunge in global stock markets should prompt U.S. authorities to act decisively on some measures, if not reviving the bailout fund, to resolve the credit crisis.
“There is still uncertainty over the bailout scheme, but the likelihood of some measures being taken to prevent markets from collapsing will make investors wary of aggressively buying Treasuries, particularly short maturities, from now on,” he said.
Investors fled to the perceived safety of sovereign debt and the yen, while commodity prices slid as investors feared the credit crisis would seriously hurt global economic growth.
Interbank rates stayed painfully high even as the Federal Reserve led yet another round of liquidity measures. The Fed more than doubled its swap limits with other central banks to $620 billion and tripled the amount of 84-day credit available.
The demand for liquidity was clear in one-month T-bill rates US1MT=RR, which were down at just 0.025 percent on Tuesday.
Investors also suspect the Fed will have to cut official interest rates, even if some at the central bank remained concerned about inflation.
Kansas City Fed President Thomas Hoenig said in a speech late on Monday that the central bank must stay focused in the longer term on holding down inflation to maintain the value of the dollar.
Hoenig also said he detects a sense that “the sky is falling” from reading and watching the news, but that the U.S. economy is resilient. [ID:nN29415652]
Eurodollar futures and fed fund futures were pricing in at least 25 basis points of easing at the Fed’s next meeting on Oct. 28/29.
Traders said the Fed’s latest boost to dollar funding globally and the shift to the third quarter could help ease some of the strains in short-term money markets, but that an improvement in three-month LIBOR would not happen until banks regain some confidence.
A senior money market trader at a European investment bank in Singapore said three-month dollar LIBOR could be set lower at 3.85 percent later in the day compared with 3.883 percent on Monday.
The latest jump in three-month LIBOR drove the spread over three-month OIS to a huge 2.3 percentage points -- up a full percentage point in just a week.
“No one wants to lend at the moment because there’s too much fear,” said the money market trader. “It’s going to take time for all that money to filter through the system.” (Reporting by Chikako Mogi and Eric Burroghs in Tokyo, Wayne Cole in Sydney; Editing by Michael Watson)