TREASURIES-Mostly higher after tame consumer prices, Fed awaited

* Market awaits Fed policy decision due Wednesday

* Treasury to auction two-year notes at 1 p.m. (1800 GMT)

By Ellen Freilich

NEW YORK, Dec 17 (Reuters) - U.S. Treasuries prices mostly firmed on Tuesday after the government said inflation was tame in November and investors waited for Wednesday's Federal Reserve policy statement.

U.S. consumer prices were flat in November, the Labor Department said. The index excluding its more volatile food and energy items rose 0.2 percent.

Traders remained focused on what the Fed will say about its stimulus program on Wednesday when it concludes a two-day policy meeting. Many analysts expect a tapering announcement in the first quarter of next year, but say a move to rein in bond buying this week is not out of the question.

"I put the probability of a tapering in December at 20 percent, January at 40 percent and March at 80 percent," said Thomas di Galoma, co-head of fixed-income rates at ED&F Man Capital (Other OTC: CGHC - news) in New York.

Recent data showing lower unemployment and improved economic indicators support an argument for the Fed to begin trimming its bond purchases, though a third element - lower inflation than the Fed wants - could prove to be a stumbling block. Fed policymakers worry that meager price increases risk deflation, a phenomenon that tends to slow economic activity.

But after analyzing the November consumer price index, Chris Rupkey, managing director and chief financial economist at Bank of Tokyo-Mitsubishi UFJ in New York, said, "Net (Frankfurt: NETK.F - news) , net inflation is not dead and there is no deflation.

"(The Fed) delayed tapering QE in September due to Washington uncertainty, and now, with Washington hours away from agreeing to fund the federal government for two more years, there is virtually no reason not to taper. We vote yes. Taper. Do it."

On the open market, benchmark 10-year Treasury notes were up 3/32, their yields at 2.87 percent, toward the high end of their recent range.

The 30-year bond price was unchanged, leaving its yield at 3.90 percent.

A Reuters poll last week showed 32 economists forecast the U.S. central bank would act in March, while 22 said it would scale back its $85 billion monthly bond-buying program in January. Twelve economists expected a tapering announcement this week.

Short-dated issues stabilized after their yields broke above key support levels on Thursday, suggesting anxiety about how long the Fed will keep policy rates near zero after it stops buying bonds, currently at a monthly pace of $85 billion.

Dealers face a continued wave of supply this week, starting with a $32 billion two-year note auction at 1 p.m. (1800 GMT).

"We do not expect any fireworks at with the 2-year underwritten around its current level - 0.33 percent, a when-issued 'roll' of 2.375 basis points," Cantor Fitzgerald strategists Justin Lederer and Scott Madison said in a note. "This is close to the cheapest the issue has traded in two months."

The Treasury will sell $35 billion in five-year debt ; $29 billion in seven-year notes ; and $16 billion in five-year Treasury Inflation-Protected Securities.