* Worries persist over drawn out U.S. budget talks * Israel, Palestinian spar raises safety bids for bonds * Storm-skewed data suggest U.S. economy weakening * Benchmark bond yields stall near 10-week lows By Richard Leong NEW YORK, Nov 15 (Reuters) - U.S. government debt prices edged higher on Thursday on worries about protracted budget talks in Washington and a showdown between Israel and the Palestinians, but safe-haven gains were limited by sentiment that the market might be overbought. With President Barack Obama winning a second term and Congress still divided between the two major political parties, investors fear they would not reach a timely deal to avert a series of automatic tax hikes and spending cuts known as the fiscal cliff which will come into effect early in 2013, pushing a still fragile U.S. economy back into recession. This worry has fed bids for low-risk Treasuries and a steep sell-off in global stock markets. Since the Nov. 6 election, the Standard & Poor's 500 index has fallen about 5 percent. Neither the White House nor top Republican lawmakers have shown they are anywhere close to arriving at a compromise, analysts said. "Everybody is focused on the fiscal cliff and slowing economic growth," said James Barnes, senior fixed income manager at National Penn Investors Trust Co in Wyomissing, Pennsylvania. "The fiscal cliff is not going to be resolved any time soon." Benchmark Treasury yields have fallen 18 basis points in six sessions to levels which some analysts and investors consider expensive. The 10-year Treasury note was up 3/32 on the day in price at 100-13/32 after trading in a range of 13/32. The 10-year yield was steady at 1.579 percent, about 20 basis points higher than its record low set in late July. "These are not attractive yields, but you see bids across the curve," said Justin Lederer, Treasury strategist at Cantor Fitzgerald in New York. Treasuries prices bounced back from initial losses on surprisingly weak figures on employment and factory activity in parts of the U.S. east coast area. However, economists blamed the surge in weekly jobless claims and a decline in manufacturing in New York and the Mid-Atlantic region on superstorm Sandy that shuttered Wall Street and left tens of thousands of people out of work. MIDDLE EAST TENSIONS EYED Investors clung to their safe-haven, albeit pricey Treasuries, partly on news two rockets fired from the Gaza Strip targeted Tel Aviv, a move that raised the stakes in a showdown between Israel and the Palestinians. Israel warplanes bombed targets in and around Gaza for a second day. Anxiety about military conflict spreading and possibly disrupting oil exports from the Middle East stoked demand for low-risk U.S. government bonds, analysts said. "You have this Middle East tension. That's an issue," Cantor's Lederer said. The fighting between Israel and the Palestinians has not caused a surge in oil prices with greater concerns over the fiscal cliff and its possible impact on the economy. Federal Reserve Chairman Ben Bernanke cautioned an improving housing market is "far from being out of the woods." With a drop in oil prices and a tame October report on U.S. consumer prices, inflation expectations touched their lowest levels since early September. The inflation breakeven rate or the yield difference between 10-year Treasury Inflation-Protected Securities and regular 10-year Treasury notes fell nearly 2 basis points to 2.37 percent. Analysts expect the tight, choppy trading in the Treasuries market will likely persist in the near term, barring a surprise budget deal from Washington or an escalation in the fighting in the Middle East. "The news flow is so negative. Bonds should outperform risky assets or at least hold in here," said Rob Robis, head of fixed income macro strategies at ING Investment Management in Atlanta.