* Surprise March retail sales drop dims U.S. growth view * Cyprus seeking more aid fuel safe-haven bids for bonds * Bets on Japanese demand persist despite mediocre auctions * Benchmark Treasuries set to pare most of week's loss By Richard Leong NEW YORK, April 12 (Reuters) - The U.S. government debt market rallied on Friday as data showing a surprise decline in consumer spending in March darkened investors' view on the U.S. economy which might still need generous support from the Federal Reserve. News about cash-strapped Cyprus asking for more help its struggling economy helped to stoke safe-haven bids for bonds, pushing up the prices on benchmark 10-year Treasuries and erasing much of their losses from earlier this week. "The recent data have turned out weaker-than-expected. This was reinforced by today's retail sales figures," said Jeff Given, portfolio manager at Manulife Asset Management in Boston. "Treasuries will remain fairly well bid with also what's going on in Japan." Persistent bets stemming from Bank of Japan's $1.4 trillion asset purchase program have underpinned support for U.S. bonds. Traders have speculated Japanese insurers and pension funds will pour money into Treasuries and higher-yielding overseas assets, anticipating BoJ's aggressive campaign will depress yields at home with the goal to stimulate its own economy. This is even more aggressive by some measures than the U.S. Federal Reserve's current bond purchase scheme, analysts said. There has been no strong sign, however, that Japanese demand for Treasuries has jumped since BoJ unveiled its stimulus plan last week. Data on this week's three U.S. government debt auctions, worth a combined $66 billion, did not suggest any pickup in foreign bids for U.S. bonds. On the open market, the benchmark 10-year note last traded up 20/32 in price at 102-16/32 to yield 1.721 percent, down 7.0 basis points from late on Thursday. The 10-year yield was on track to end up about 1 basis point on the week after falling the previous four weeks from an 11-year month high set in early March. The 30-year bond last traded up 1-16/32 in price at 104 to yield 2.922 percent, down 7.5 basis points on the day but up 4.6 basis points from a week earlier. U.S. Treasuries fared better than Japanese government debt. The yield premium on 10-year Treasuries over their Japanese counterparts shrank to 1.10 percentage points on Friday, down from 1.24 points on Thursday and the tightest level since late January, according to Reuters data. MORE WORRISOME U.S. DATA The March U.S. retail sales reading, which fell 0.4 percent, was the latest evidence that domestic economic growth slowed in the latter part of the first quarter after a robust start. Disappointing data, including an abysmal March payroll report a week ago, led economists to mark down their forecasts for first-quarter gross domestic product to the high-2.0 percent to low-3.0 percent area, from an earlier mid-to-high 3.0 percent range. Many economists forecast second quarter GDP, based the latest data, might slow to roughly 1 percent. This dour prospect for the American economy will likely keep Fed Chairman Ben Bernanke and other top policymakers clinging to their near-zero interest rate policy and purchases of bonds, currently at $85 billion a month, to avert a recession. "For bonds, it's a win if Bernanke and the Fed remain all-in," said Robbert Van Batenburg, director of market strategy at Newedge USA LLC in New York. Boston Federal Reserve President Eric Rosengren on Friday told CNBC television: "This is not the time to take away the accommodation." While traders' worries about the U.S. economy intensified, they cast a wary eye on Europe as the region struggled to contain its festering debt crisis. Cypriot President Nicos Anastasiades told reporters in Nicosia on Friday that he would send a letter to European Commission President Jose Manuel Barroso and European Council President Herman Van Rompuy seeking extra assistance for Cyprus, given the bad economic situation of the island. Euro zone finance ministers said, however, there were no plans or requests beyond the 10 billion euros of loans already on the table.