* Benchmark yields jump above 2 percent on Bernanke's QE comments
* FOMC minutes may offer more clues on future of QE3
* Fed buys up to $1.75 bln in long-dated Treasuries
* U.S. existing home sales rise to near 3-1/2-year high
By Richard Leong
NEW YORK, May 22 (Reuters) - Treasury debt prices fell on Wednesday with benchmark yields briefly rising above 2 percent as Federal Reserve Chairman Ben Bernanke kept alive market worries 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 and crossed into negative territory when Bernanke said tapering of the Fed's bond purchases by September was probable if data show U.S. growth is on a sustainable path.
"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.
Fed policymakers will meet next on June 18-19.
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 jobs report earlier this month.
"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.
On the open market, benchmark 10-year Treasury notes fell 25/32 in price to trade at 97-19/32 with a yield of 2.021 percent, up 9.1 basis points from late on Tuesday. The 10-year note's yield touched 2.044 percent - its highest level since mid-March and has risen about 0.40 percentage point since May 1.
The 10-year yield fell just short of 2 percent on Tuesday as it retreated following dovish comments from St. Louis Fed President James Bullard and New York Fed chief William Dudley. A rally in mortgage-backed securities, fueled by Dudley's comments about the Fed being unlikely to sell its mortgage holdings, spurred investors to buy Treasuries.
Traders and analysts have reckoned whether the Fed might taper QE3, which involves monthly purchases of $85 billion in Treasuries and mortgage-backed securities, sooner than previously thought in response to an improving economy, albeit one still growing at a sluggish pace.
Recent comments from several Fed policymakers have stoked this view, causing a selloff in Treasuries that sent benchmark yields on Tuesday to their highest in over two months.
Still it is the view of Bernanke as head of the U.S. central bank that carries the most weight in financial markets.
"Bernanke is the man-in-charge," said Larry Milstein, head of U.S. agency and government trading at R.W. Pressprich & Co in New York.
Despite his tapering remark, Milstein and Schwab's Jones both see the Fed as committed to its current pace of bond purchases as unemployment has remained high and the economy still faces the drag from fiscal constraints as well as the European debt crisis.
"It's full steam ahead with QE for now. They will err on the side of easy policy," Milstein said.
Bernanke's testimony before the congressional panel was seen as the week's premier event in the Treasury market. The Fed chairman was expected to signal whether or not the central bank is ready to start rolling back its ultra-easy monetary stance after keeping U.S. interest rates near zero and buying bonds for more than four years.
Investors might receive more clues about the Fed's thinking on the path of monetary policy when it releases the minutes of its April 30-May 1 policy meeting at 2 p.m. EDT (1800 GMT).
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 to $1.86 trillion.
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.
Critics have said the Fed's massive balance sheet will hobble its ability to fight inflation down the road, and that the billions with which it has flooded the economy may be overheating certain markets such as stocks and junk bonds.
The U.S. central bank is scheduled to buy $1.25 billion in Treasuries due February 2036 to May 2034 after it purchased $1.450 billion of these federal debt maturities on Monday.
After two days bereft of major economic data, the National Association of Home Builders said will release at 10 a.m. EDT said U.S. home resales accelerated to a 4.97 million annualized unit rate in April, the strongest monthly pace in nearly 3-1/2-years. Economists projected an annualized rate of 4.99 million units.
