TREASURIES-Weak data brings shorter debt back into vogue

* Weak regional business activity boosts short end

* ADP says U.S. private payrolls fall more than expected

* Fed's Lockhart says too early to end financial support

* Benchmark yields down about 23 bps in 3rd quarter (Updates market action, adds quote)

NEW YORK, Sept 30 - Short-dated U.S. Treasuries rose on Wednesday as unexpectedly weak data on jobs and regional business activity reminded investors that it may take a long time for the economy to return to robust health.

Private sector employers cut more jobs than forecast and business activity in the U.S. Midwest failed to return to growth in September as expected, enhancing the safe-haven allure of government bonds.

The data suggested the economy remains too weak to withstand Federal Reserve interest rate hikes, reversing several days of short-dated debt selling on worries the Fed was closer to tightening monetary policy.

Atlanta Federal Reserve Bank President Dennis Lockhart underscored this message, saying the U.S. economy was starting a tentative recovery, but it is too early to embark on a full-on exit from the central bank's accommodative policies.

"All points to the Fed not moving any time soon," said Larry Milstein, head of government and agency trading at R.W. Pressprich & Co. in New York.

"There is still a large drag on the economy and inflation is not an issue."

Two-year Treasury notes rose 3/32 on the day, yielding 0.96 percent versus 1.01 percent at Tuesday's close.

But those gains came at the expense of longer dated debt.

Benchmark 10-year notes fell 2/32 in price to yield 3.31 percent.

Still, it has not been a bad quarter's worth of gains for 10-year notes, which has resulted in about a 23-basis-point fall in yields through the end of September.

It also marks a reversal from the roughly 130 basis point rise in yields over the first and second quarters.

For the month of September alone, benchmark yields fell about 10 basis points.

The 30-year long bond fell nearly a point on the day in afternoon trading. Long bonds were last down 13/32, yielding 4.04 percent versus 4.02 percent at Tuesday's close.

SO SENSITIVE

Shorter dated debt is considered particularly sensitive to changes in the outlook for Federal Reserve interest rate policy and had underperformed longer dated bonds in recent sessions over concerns the U.S. central bank would tighten sooner than expected.

Fed Governor Kevin Warsh sparked those worries when he said on Friday that the central bank may begin to tighten its super-loose monetary policy before it is clearly necessary.

Warsh's comments hurt shorter dated debt but soothed long-term bond investors by showing the Fed was ready to pounce on inflation the moment it becomes a threat. Inflation erodes the value of longer dated bonds and their cash flows.

Dallas Federal Reserve President Richard Fisher followed up on that theme on Tuesday, saying the winding down of the Fed's accommodative monetary policies needed to start as soon as the economy shows convincing signs of traction.

It appears officials are trying to guide expectations between fears of premature tightening and worries of leaving policy loose for too long, an issue that Federal Reserve Vice Chairman Donald Kohn addressed on Wednesday.

Kohn said policymakers would raise benchmark interest rates well before consumer spending and business investment overheats.

However, investors gave bigger weight to the weak data, especially with a national manufacturing reading due on Thursday and Friday's employment report from the government, which is the biggest release on the monthly economic calendar.

The rally in two-year debt caused those rates to fall in relation to longer dated yields, which is known as a steepening of the yield curve. This reversed a strong trend of yield curve flattening fueled by Warsh's comments.

"People are getting out of some flattening trades because we've had weak data two or three days in a row now," said Rick Klingman, managing director of Treasury trading at BNP Paribas in New York.