US STOCKS-Wall St pares early losses as US Treasuries rebound

* AOL (Xetra: 6OL.DE - news) jumps to 15-month high on Verizon (NYSE: VZ - news) 's $4.4 bln offer

* 10-yr U.S. Treasury yields fall after touching 6-month highs

* U.S. small business confidence rises in April

* Gap falls after first-qtr sales decline

* Indexes down: Dow 0.03 pct, S&P 0.12 pct, Nasdaq 0.06 pct (Updates to early afternoon)

By Tanya Agrawal

May 12 (Reuters) - U.S. stocks pared most of their early losses on Tuesday after Treasury yields fell from their six-month highs as some buyers came back to the market.

Stocks indexes had earlier fallen to their lowest in about a week, tracking European markets amid a global bond rout.

Ten-year U.S. Treasury yields, the benchmark for global borrowing costs, touched their highest since mid-November earlier in the day. Elevated U.S. yields mean higher borrowing costs, which can affect stock markets across the world.

The government will sell $24 billion in new three-year notes, the first of the $64 billion in new supply this week.

Bonds have been the primary driver in the stocks market in recent days.

"You can't have a dramatic move in such a significant part of the capital market without creating ripples elsewhere," said Erik Davidson, chief investment officer at Wells Fargo Private Bank.

U.S. small business owners gained confidence in April and were surprisingly bullish about capital expenditure plans, further supporting views that economic growth was rebounding after a dismal first quarter.

At 13:25 p.m. ET (1725 GMT) the Dow Jones industrial average was down 5.08 points, or 0.03 percent, at 18,100.09, the S&P 500 was down 2.49 points, or 0.12 percent, at 2,102.84 and the Nasdaq Composite was down 2.86 points, or 0.06 percent, at 4,990.72.

AOL shares jumped as much as 19.1 percent to $50.75, a 15-month high, after Verizon Communications (Xetra: 868402 - news) said it would buy the company in a $4.4 billion deal, or $50 per share. Verizon was down marginally at $49.75..

Seven of the 10 major S&P 500 sectors were down, with the materials index leading the declines with a 0.8 percent fall.

Dow Chemical Co was the biggest loser on the index with its shares down 1.6 percent. Monsanto fell 1 percent.

The energy index gained 0.5 percent as oil prices rose about 3 percent due to a weaker dollar and the conflict in Yemen.

Pall Corp rose 19 percent to $118.13 after the Wall Street Journal reported the company was in the final stages of an auction to sell itself.

Gap fell 3.6 percent to $38.39 after the company reported comparable sales decline of 4 percent in the first quarter.

U.S. Federal budget numbers for April are expected to be released at 2 p.m. (1800 GMT)

Declining issues outnumbered advancing ones on the NYSE by 1,619 to 1,367, for a 1.18-to-1 ratio on the downside; on the Nasdaq, 1,489 issues fell and 1,177 advanced for a 1.27-to-1 ratio favoring decliners.

The S&P 500 index posted 3 new 52-week highs and 6 new lows; the Nasdaq Composite recorded 41 new highs and 55 new lows. (Editing by Saumyadeb Chakrabarty)