By Karen Brettell NEW YORK, Sept 26 (Reuters) - U.S. government debt prices rose on Wednesday as resurgent fears over Europe drove investors to the safe-haven bonds, with worries flaring that Spain's reluctance to ask for a full-blown bailout would prolong the region's debt crisis. Longer-dated U.S. yields touched their lowest levels in more than two weeks, more than erasing the spike earlier this month in reaction to the Federal Reserve's announcement of a third large-scale bond purchase program, nicknamed QE3. Fears over Europe helped the Treasury Department sell $35 billion of new five-year securities to strong demand, and raised expectations for a $29 billion sale of seven-year notes on Thursday, the last of this week's $99 billion in coupon-bearing supply. "This is the first small crack we've seen in the EU bond market since the beginning of August," said Jim Vogel, interest rate strategist at FTN Financial in Memphis, Tennessee. The yield on 10-year Spanish debt rose to 6 percent on Wednesday, a threshold analysts consider unsustainable. Spain's 10-year borrowing cost has been running above 6 percent for much of the time since mid-May. With Spain's borrowing costs rising again and a key region threatening to secede, Spanish Prime Minister Mariano Rajoy hinted he was ready to request a rescue for the euro zone's fourth-biggest economy. He told the Wall Street Journal on Wednesday he would make the move if Spain's debt costs remained too high for too long. Previous stresses in the region have prompted euro zone officials to give assuring statements in an effort to soothe markets, and similar statements overnight may help markets regain confidence, and ease demand for safe-haven bonds, if they occur, said Vogel. That said, "there is always a nice solid demand base for seven-year notes based on the curve steepness and the Fed's propensity to buy what is left over in the market," Vogel added. The Fed has been purchasing seven-year notes as part of its Operation Twist program, which is designed to lower longer-term rates. The five-year notes sold at a high yield of 0.647 percent on Wednesday, just below where the debt was trading before the auction. Traders are pricing in expectations that the seven-year debt will sell at yields of around 1.045 percent on Thursday , just above the 1.026 percent level the notes traded at in the secondary market. Statements from Philadelphia Fed President Charles Plosser that he believes that QE3 will not do much to boost economic growth or lower unemployment also added to doubts about how effective the latest program will be, hurting risk assets including stocks and helping bonds. "The market is pleased with the liquidity provided by the central banks, but it's skeptical about its impact on real economic growth," said Gibson Smith, co-chief investment officer of fixed income with Janus Capital Group in Denver. U.S. government data also showed an unexpected dip in new home sales in August, reducing optimism the housing recovery gained traction. U.S. benchmark 10-year Treasury notes were last up 15/32 in price to yield 1.62 percent, down from 1.67 percent late on Tuesday. The 30-year bond rose 1-1/32 in price to yield 2.80 percent, down from 2.85 percent.