By Ellen Freilich

NEW YORK (Reuters) - U.S. Treasuries prices fellfor a third straight day Friday as data on the U.S. labormarket offered at least a temporary balm for fears the world'slargest economy may be headed for a double-dip recession.

The government reported that the U.S. private sector added67,000 jobs, a surprisingly large number, to payrolls inAugust.

The Labor Department also said that overall U.S. employmentfell for a third straight month, but the drop was far less thanthe market expected.

The data weakened investors' demand for safe-haven U.S.government debt, causing the benchmark 10-year Treasury noteto fall more than a point in price, its yieldrising to 2.76 percent from 2.625 percent late Thursday.

"We've seen some pretty hefty asset allocation trades outof bonds and into stocks," said Kim Rupert, managing directorof global fixed income analysis at Action Economics LLC in SanFrancisco.

Overall non-farm payrolls fell by 54,000 but this waslargely because temporary federal census jobs decreased by114,000, and so private employment was seen as a better measureof labor market health.

Bonds erased some losses, however, when an index ofactivity in the nation's non-manufacturing sector came inweaker than expected.

The 30-year bond , down two points before theInstitute for Supply Management data was released, was down1-10/32 afterward. Its yield stood at 3.79 percent versus 3.72percent Thursday.

The employment component of the ISM index came in below 50,a reading that points to shrinking hiring.

"(The ISM index was) a weaker number, so Treasuries paredsome of the day's losses," said Sean Simko, fixed-incomeportfolio manager with Investment Management Company SEI inOaks, Pennsylvania.

Simko said the below-50 reading on the employment componentshowed that companies "continue to be wary of hiring."

The Treasury market also faces supply next week with theTreasury auctioning three-, 10- and 30-year securities.

The supply provided an "extra incentive to cheapen up theTreasury market a little," Rupert said.

Before a long holiday weekend, "huge" market moves mightnot be sustained, she added.

Bond prices have steadily marched higher in recent months,pushing yields to historic lows as investors sought outlower-risk assets in a barrage of data pointing to a falteringeconomic recovery. The ultimate fear was the United States washeading for a Japan-style decade of deflation.

But bond prices fell Wednesday after manufacturing datafrom China and the United States raised some hopes that theeconomic recovery may not be in as much jeopardy as some otherrecent economic data had suggested.

Data showing some signs of life in the housing markethelped push prices even lower on Thursday and that trendcontinued on Friday when August U.S. employment data offered aless grim picture than forecast. (Additional reporting by John Parry and Burton Frierson;Editing by Padraic Cassidy)