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

(Adds quotes, updates prices)

* Yields fall as European bonds rally

* Draghi remarks stir hopes of further ECB stimulus

* Weak German sentiment, French political issues increase

safety bid

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

By Karen Brettell

NEW YORK, Aug 25 (Reuters) - U.S. Treasuries prices gained

modestly on Monday in light trading in line with rallying

European bonds 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.

Treasuries also gained earlier on Monday on weak business

sentiment data in Germany for the fourth month running and after

a row over the lack of growth led the French government to

resign.

"We had a small safe haven bid," said John Canavan, fixed

income analyst at Stone McCarthy Research Associates in

Princeton, New Jersey.

Durable goods data on Tuesday will be the next focus, before

the Treasury is also due to begin auctioning $93 billion in new

coupon-bearing supply this week.

"I think durable goods orders in the morning will get more

attention, in part because of some of the uncertainty about it,"

Canavan said.

The Treasury will sell $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.

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

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

holiday on Monday.

(Editing by Bernadette Baum and Andrew Hay)