TREASURIES-Bonds build on weaker home sales

* Existing home sales fall unexpectedly

* Seven-year auction still ahead (Recasts with housing figures, adds comments, updates prices)

NEW YORK, Sept 24 - U.S. Treasury debt prices climbed on Thursday after data showing a surprise drop in home sales confirmed the sector's ongoing travails, reviving the appeal of safe-haven bonds.

The housing market, due to its central role in the U.S. economic crisis, is seen by investors as key to any sustained recovery.

The latest numbers suggested a recent rebound was at best tentative. Existing home sales unexpectedly fell to an annual rate of 5.10 million units, well below market forecasts of 5.35 million.

"Those that think we've reached a bottom in housing are going to be sorely disappointed," said Marty Mitchell, head of government bond trading, Stifel Nicolaus in Baltimore.

That was indeed the sentiment in the stock market, where the S&P 500 was down 1 percent. As some traders shifted into Treasuries, benchmark 10-year notes <US10YT=RR> climbed 10/32 for a yield of 3.38 percent, pushing yields four basis points lower.

Preventing further gains, a snapshot of the labor market showed a surprise drop in weekly jobless claims to 530,000, compared with projections around 550,000.

Many were also reluctant to buy ahead of a looming auction of $29 billion in seven-year notes, a maturity seen as more difficult to absorb because it was only recently reintroduced.

Existing seven-years <US7YT=RR> rose 9/32 and were yielding 2.99 percent, down five basis points. Two-year note<US2YT=RR>yields were off two basis points at 0.95 percent.