TREASURIES-Yields drop as hopes for more ECB stimulus boosts demand

* Yields fall as European bonds rally

* Draghi remarks stir hopes of further ECB stimulus

* Treasury to sell $93 bln in 2-, 5-, 7-year notes

By Karen Brettell

NEW YORK, Aug 25 (Reuters) - U.S. Treasuries yields dipped

on Monday in light trading, as European bonds rallied on

expectations the European Central Bank will use more stimulus to

revive flagging growth in the region.

ECB President Mario Draghi said Friday the bank was prepared

to respond with all available tools if euro zone inflation drops

further. Investors took this to mean the ECB could start an

asset purchase program or other stimulus measures, which would

boost assets like stocks and bonds.

Draghi's comments caused yields on most euro zone government

bonds to fall to record lows, with Treasuries also benefiting

from the rally.

"Part of it is the rally in European rates. Generally

markets are pricing for a higher chance of the ECB being more

accommodative going forward," said Michael Chang, an interest

rate strategist at Credit Suisse (NYSE: CS - news) in New York.

Benchmark 10-year notes were last up 3/32 in

price to yield 2.40 percent, down from 2.41 percent late on

Friday.

Trading was modest ahead of the U.S. Labor Day holiday on

Sept. 1, with traders in Britain out for a bank holiday on

Monday.

New supply is likely to be the major focus this week, with

gross domestic product data on Thursday also anticipated.

The Treasury will sell $93 billion in new coupon-bearing

debt this week, including $29 billion in two-year notes on

Tuesday, $35 billion in five-year notes on Wednesday and $29

billion in seven-year notes on Thursday.

It will also sell $13 billion in two-year floating rate

notes on Wednesday.

(Editing by Bernadette Baum)