* Obama, top lawmakers hold budget talks * Israeli, Palestinian fighting keeps investors on edge * Benchmark yields touch lowest levels since early Sept * Storm-skewed industrial data suggests slowing U.S. growth By Richard Leong NEW YORK, Nov 16 (Reuters) - U.S. government debt prices rose on Friday with yields touching their lowest levels in over two months on skepticism over whether Washington will produce a deal to avoid a budget crisis and worries about fighting between Israel and the Palestinians. The bond market's gains were capped by stabilization in Wall Street stocks which have been pummeled by fears that U.S. President Barack Obama and Congress will fail to reach a timely compromise to avoid the "fiscal cliff," a series of automatic tax hikes and spending cuts which would phase in in early 2013. Such a severe move could stun the U.S. economy back into recession, according to many economists. "There's a lot of fears with the fiscal cliff and the Middle East," said Charles Comiskey, head of Treasury trading at the Bank of Nova Scotia in New York. "Treasuries continue to be a safe-haven security. A lot of money is pouring in here." The bullish tone in Treasuries was also supported by data showing U.S. industrial output unexpectedly fell 0.4 percent in October due to Sandy, a deadly storm that disrupted businesses along the East Coast, although the trend was consistent with slowing manufacturing activity. Benchmark 10-year Treasury notes rose 6/32 in price at 100-15/32, yielding 1.574 percent, down 2 basis points on late Thursday. The 10-year yield was on track to fall for a fourth straight week, touching 1.556 percent earlier, which was only 17 basis points above its record low set in late July. Major U.S. stock indexes rebounded from their initial losses, although the Standard & Poor's 500 index has fallen more than 4 percent lower over the past two weeks. On Friday, top lawmakers from both major U.S. political parties spoke after a meeting at the White House, hinting at the possibility of a budget compromise that involves spending cuts and additional revenue, although they were short on details. Some analysts saw encouraging signs a deal will emerge within six weeks before the "fiscal cliff" starts to kick in, while others were doubtful that the Democrats and Republicans were close to a compromise about raising taxes and reducing social programs including Medicare. Some analysts believe Washington will likely come up with an agreement that provides short-term fixes to the most contentious issues on taxes and spending so they could buy time to negotiate longer-term deficit reduction goals. "A grand bargain is just as hard to attain as it was eighteen months ago. A lesser bargain is more likely, which will appease both sides," said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott in Philadelphia. While U.S. lawmakers sought to comfort financial markets, the fighting between Israelis and Palestinians kept investors on edge with signs of growing mobilization on both sides. Investors also watched developments in Greece whose international lenders have been squabbling over how to keep the heavily indebted nation solvent. While anxious investors have flocked into Treasuries to shield their cash from the uncertainties in Washington, Europe and the Middle East, some strategists cautioned against holding an excessive amount of U.S. government debt whose longer-dated yields are barely keeping up with inflation. "There's a real yield deficit," said Dan Heckman, senior fixed income strategist at U.S. Bank Wealth Management in Minneapolis. He recommended investors hold high-quality corporate and municipal bonds for their higher yields.