TREASURIES-Bonds stumble before Fed as auction disappoints

* $40 billion five-year note auction poorly received

* Bond investors bet Fed will upgrade growth assessment (Adds auction results, adds comments, updates prices)

NEW YORK, Sept 23 - U.S. Treasury debt prices fell on Wednesday ahead of a Federal Reserve policy announcement and after an auction of $40 billion in new five-year notes was met with some reservation.

Dealers remained nervous ahead of a Fed statement that could offer some inklings into the central bank's thinking on how it might eventually remove record doses of monetary stimulus from the financial system.

In particular, traders believed the Fed would upgrade its assessment of current economic conditions, to the detriment of government securities.

"The Fed's assessment of economic conditions is most likely to be modified to indicate that an economic recovery is underway," said Asha Bangalore, economist at Northern Trust in Chicago.

Overall demand for the five-year notes was actually solid, but only after a steep price discount that left the final yield above market expectations.

The new notes garnered a 2.47 percent rate, and were met with bids for 2.4 times the amount of debt on offer, above the 12-month average for that maturity. Indirect bidders, a loose proxy for foreign interest, came in at 44.6 percent, well above the 38.46 percent average seen in the past year.

"The auction was not as good" as some expected, said Rudy Narvas, senior analyst at 4Cast Ltd.

Benchmark 10-year notes lost 11/32 for a yield of 3.49 percent, up four basis points on the day. Existing five-year notes were off 4/32 and yielding 2.45 percent.