* Benchmark yields jump above 2 percent on Bernanke's QE comments
* Fed buys $1.25 billion in long-dated Treasuries
* Jobless claims data on Thursday in focus
By Karen Brettell
NEW YORK, May 22 (Reuters) - U.S. Treasury yields on the benchmark 10-year note rose above the key 2 percent level on Wednesday, the highest level in two months, as Federal Reserve Chairman Ben Bernanke added to bond investor fears that the U.S. central bank might slow its bond purchases later this year if the economy improves further.
Bernanke initially delivered what bond bulls had hoped for following dovish remarks from two top Fed officials on Tuesday, telling federal lawmakers in prepared remarks the Fed's current policy has produced significant benefits and cautioning that a premature pullback would hurt the economy. These remarks lifted bond prices to session highs in early trading.
A half hour later, however, the bond market's gains swiftly evaporated when Bernanke said during a question-and-answer session that tapering off the Fed's bond purchases by September was probable if data show U.S. growth is on a sustainable path.
"He made the statement that they could taper in the next three meetings and everybody got caught," said Charles Comiskey, head of Treasuries trading at Bank of Nova Scotia (Other OTC: BKSHF - news) in New York. "The dislocations were everywhere, then the selling came in. Then it just cascaded."
Benchmark 10-year Treasuries were last down 27/32 in price to yield 2.02 percent, up from a low of 1.89 percent immediately after Bernanke's speech.
Thirty-year bonds fell 1-15/32 in price to yield 3.21 percent, up from a low of 3.13 percent earlier on Wednesday.
Speculation has intensified as to whether the Fed might reduce its third round of large-scale asset purchases, known as quantitative easing or QE3, ever since a better-than-expected April U.S. jobs report this month.
"If we see continued improvement and we have confidence that that's going to be sustained, then we could, in the next few meetings, we could take a step down in our pace of purchases," Bernanke said during the question-and-answer portion of his testimony before the congressional Joint Economic Committee, adding to the speculation.
"His prepared remarks were dovish, but some people were obviously surprised by his tapering comment during the Q&A," said Kathy Jones, fixed-income strategist at Charles Schwab in New York.
Treasuries held their losses even after minutes from the Fed's meeting on April 30-May 1 held a dovish tone. The minutes showed that many Fed officials want to see more evidence that the economy is recovery before tapering bond purchases.
Fed policymakers will meet next on June 18-19.
Treasuries investors are now likely to be even more responsive to economic data points as they come out, likely adding volatility to the market and holding 10-year notes over the 2 percent level for now, said Comiskey.
"We're going to start living day to day by the data," he said, saying that the 2 percent level may now form technical resistance on 10-year Treasuries yields, which may next rise to the 2.10 to 2.12 percent area.
The next data point will be Thursday's release of initial jobless claims, which is expected to show that claims for state unemployment benefits fell to 345,000 from 360,000 last week, according to the median estimate of economists polled by Reuters.
The Fed bought $1.25 billion in bonds due from 2036 to 2043 on Wednesday as part of its ongoing purchase program.
It will buy between $3 billion and $3.75 billion in notes due 2019 and 2020 on Thursday.
The Fed's balance sheet has ballooned to $3.3 trillion as of May 15 as its Treasuries holdings have more than quadrupled since it adopted quantitative easing in late 2008.
Its ownership of mortgage-backed securities totaled $1.15 trillion last week, compared with none in September 2008, just before the collapse of Lehman Brothers amid the global financial crisis. (Additional reporting by Richard Leong; Editing by Diane Craft and James Dalgleish)