TREASURIES-Yields drop as risk appetite fades on emerging market worries

* Stronger-than-expected U.S. data briefly boosts yields

* Turkish lira rises, but other EM currencies fall

* U.S. yield curve flattens

(Adds comment; updates prices)

By Gertrude Chavez-Dreyfuss

NEW YORK, Aug 15 (Reuters) - U.S. Treasury yields fell on

Wednesday after two straight days of gains as risk appetite

soured amid nagging concerns about fallout from the Turkish

crisis hitting other emerging markets.

The yield curve also flattened, with the spread between U.S.

2-year and 10-year notes narrowing to 23.2 basis points

, the tightest gap since at least March 2010,

according to Reuters data. A flatter yield curve reflects market

uncertainty.

Stronger-than-expected U.S. economic numbers briefly lifted

yields, but they soon hit new session lows as buying of

Treasuries resumed.

"Right now, the overall sentiment, especially toward

emerging markets, is fragile, and then you have the strong

dollar, which is adding to uncertainty," said Keith Lerner,

chief market strategist at Suntrust Advisory Services in

Atlanta (BSE: ATLANTA.BO - news) .

While the Turkish lira moved further away from

record lows, other emerging market currencies, such as the South

African rand and the Mexican peso, faltered.

The lira continued to rally on liquidity measures announced

by the Turkish central bank on Tuesday.

A leading emerging market stock index entered into what is

commonly regarded as bear territory on Wednesday, down 20

percent since January, as a fresh wave of selling extended a

slump.

In afternoon trading, U.S. 10-year yields fell to 2.849

percent, down from Tuesday's 2.895 percent. U.S.

30-year yields slid to 3.022 percent, from 3.062

percent late on Tuesday.

On the front end of the curve, U.S. 2-year yields eased to

2.604 percent from 2.633 percent on Tuesday.

Earlier, yields pared losses after a batch of

stronger-than-expected U.S. economic data reinforced

expectations of an interest rate hike by the Federal Reserve

next month. The data was led by U.S. retail sales, which rose

0.5 percent in July, beating expectations.

Other reports showed U.S. productivity in the second quarter

was the strongest in three years, while the New York Fed's

business index also overshot the consensus forecast.

"With (Other OTC: WWTH - news) retail sales still robust and inflationary pressures

building, the Fed isn't going to be distracted by volatility in

emerging markets and will continue to increase interest rates,"

said Andrew Hunter, U.S. economist at Capital Economics in

London.

That said Fed funds futures are rallying in tandem with

Treasuries, on safe-haven flows, analysts said. While a

September rate hike has been fully priced in, the chances of a

fourth hike this year diminished to around 63 percent on

Wednesday, from around 67 percent a week ago, according to CME's

FedWatch.

August 15 Wednesday 2:42PM New York / 1842 GMT

Price

US T BONDS SEP8 144-25/32 0-24/32

10YR TNotes SEP8 120-116/256 0-88/256

Price Current Net

Yield % Change

(bps)

Three-month bills 2.03 2.0688 -0.013

Six-month bills 2.175 2.2297 -0.008

Two-year note 100-10/256 2.604 -0.029

Three-year note 100-58/256 2.6708 -0.035

Five-year note 100-34/256 2.721 -0.046

Seven-year note 100-128/256 2.7953 -0.045

10-year note 100-56/256 2.8497 -0.045

30-year bond 99-140/256 3.0231 -0.039

DOLLAR SWAP SPREADS

Last (bps) Net (LSE: 0LN0.L - news)

Change

(bps)

U.S. 2-year dollar swap 19.00 -0.75

spread

U.S. 3-year dollar swap 16.50 -1.00

spread

U.S. 5-year dollar swap 13.50 -0.25

spread

U.S. 10-year dollar swap 6.25 -0.50

spread

U.S. 30-year dollar swap -7.50 -0.50

spread

(Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by

April Joyner; Editing by Dan Grebler and Leslie Adler)