TREASURIES-Bond prices dip on higher Jan core CPI, weak 7-yr auction

* Traders focus on higher U.S. core CPI (Other OTC: CPICQ - news) for January

* Seven-year note auction meets with soft demand

* Month-end buying, lower European yields cap losses (New (KOSDAQ: 160550.KQ - news) throughout, updates prices, adds comments)

By Sam Forgione

NEW YORK, Feb 26 (Reuters) - U.S. Treasuries prices fell on Thursday after an increase in core U.S. consumer prices in January pointed to marginally less dovish Federal Reserve policy and as an auction of seven-year notes met with soft demand.

Core CPI, which strips out food and energy costs, rose 0.2 percent in January after edging up 0.1 percent in December. Traders focused on the increase even as the headline figure showed U.S. consumer prices posted their biggest drop since 2008 in January, falling 0.7 percent.

The 30-year Treasury yield posted its biggest one-day rise in over a week. Yields move inversely to prices.

Traders said the core CPI reading slightly reduced expectations that the Fed would take a more dovish stance on monetary policy. The data came after two days of congressional testimony by Fed Chair Janet Yellen, when investors interpreted her remarks as indicating the U.S. central bank was giving itself more flexibility to hike interest rates later than June.

San Francisco Fed President John Williams, in an interview on Fox Business Network, said Thursday that the Fed will probably start raising rates "sometime this summer, or this fall" if the economic data come in as expected.

"This piece of data suggests that they should be more apt to commence tightening," said Ian Lyngen, senior government bond strategist at CRT Capital in Stamford, Connecticut.

In addition, soft demand at the Treasury's auction of $29 billion in seven-year notes weighed on prices. The securities fetched a higher yield than in January.

"I would call it lackluster," Lyngen said on the auction.

Analysts said that the core CPI data, while not bolstering the case for a dovish Fed, had a limited impact since more data would be necessary to provide a clearer trajectory as to the Fed's next move. Month-end buying and lower European yields also prevented U.S. Treasury yields from rising above recent ranges.

"The lower European yields do kind of limit how far you can move up in rates," said Sean Murphy, a Treasuries trader at Societe Generale (Paris: FR0000130809 - news) in New York.

U.S. 30-year Treasury bonds were last down 1-10/32 in price to yield 2.63 percent, from a yield of 2.57 percent late Wednesday. Benchmark 10-year notes were off 20/32 to yield 2.04 percent, from a yield of 1.97 percent late Wednesday.

U.S. three-year notes dipped 5/32 to yield 1.03 percent, from a yield of 0.97 percent late Wednesday. (Editing by Jeffrey Benkoe and James Dalgleish)