TREASURIES-Bonds rise on jobless data before 7Y note auction

* Surprising jump in jobless claims revives economic worry * Traders shift focus to $27 bln 7-year debt auction * Fed buys $3.25 bln in long-dated Treasuries * Final Q1 GDP reading less negative than forecast (Recasts, updates market action)

NEW YORK, June 25 - U.S. Treasury debt prices rose on Thursday after an unexpected jump in jobless claims revived economic worries, supporting the view the Federal Reserve will need to keep interest rates near zero for the foreseeable future.

Bidding for bonds intensified as traders sought to cover short positions after the U.S. central bank bought $3.25 billion in long-dated issues and before the Treasury's $27 billion auction of seven-year notes at 1700 GMT, analysts said.

"It's all about jobs and people's ability to pay their mortgages," said Glen Capelo, co-head of rates at BroadPoint Capital in New York, who added that the financial system and the economy "are still in trouble."

Demand for Treasuries emerged after Wednesday's sell-off. Traders were disappointed the Fed opted not to expand its Treasury purchase program despite saying it plans to keep rates low for "an extended period."

The two-year Treasury note>, which is sensitive to the market's outlook on Fed policy, rose 3/32 in price to 99-29/32. Its yield, which moves inversely to its price, was 1.16 percent, down 5 basis points from late on Wednesday.

The benchmark 10-year U.S. Treasury note shot up 10/32 in price to 95-22/32, while its yield slipped to 3.65 percent, down from 3.70 percent late on Wednesday.

The U.S. Labor Department reported first-time filings for jobless benefits climbed to 627,000 in the week ended June 20 from an upwardly revised 612,000 in the previous week. Analysts had forecast a reading of 600,000.

The government's upward revision of its reading on first-quarter gross domestic product was not enough to take away the sting of the latest jobless report. The jobless data had driven Wall Street lower at the opening, but the U.S. stock market has since rebounded.

The Commerce Department adjusted its final first-quarter GDP figure to minus 5.5 percent, compared with a previous reading of minus 5.7 percent.

With the day's key data out of the way, traders were juggling their bond positions to prepare for the Fed's purchase of U.S. government debt maturing in 17 to 30 years, as well as the last leg of this week's record $104 billion Treasury auction of coupon debt, analysts and traders said.

"Some people seem to be covering after the (Fed) buyback," said Michael Franzese, head of government trading at Standard Chartered in New York.

On Thursday, the Fed bought $3.25 billion in Treasuries maturing in 17 to 30 years, bringing its cumulative purchase to $181 billion since late March. This is equivalent to 60 percent of the $300 billion it is committed to buy in a move to hold down long-term borrowing costs to help the economy.

After the Fed's latest purchase operation, the U.S. Treasury will sell $27 billion in seven-year notes. Thursday's auction follows robust sales of two-year and five-year debt earlier this week.

The government has planned to issue $2 trillion in new debt to finance its stimulus package and various bailouts.

"We have a lot of supply and you will have a lot of seesaw patterns in the rates structure," BroadPoint's Capelo said.