* Q2 GDP revision, jobless claims drop should give Fed leeway to taper
* Decent demand foreseen for Treasury sale of $29 bln in 7-yr notes at 1700 GMT
* Fed scheduled to buy long-dated Treasuries
By Ellen Freilich
NEW YORK, Aug 29 (Reuters) - U.S. Treasuries were narrowly lower on Thursday after the government said new jobless claims fell last week and that the economy grew more quickly in the second quarter than earlier reported, data that appeared to give the Federal Reserve leeway to trim its economic stimulus.
Gross domestic product grew at a 2.5 percent rate in the second quarter instead of the 1.7 percent reported previously, the Commerce Department said. The Labor Department said new claims for state unemployment insurance fell 6,000 to a seasonally adjusted 331,000 in the week ended Saturday, slightly fewer new claims than economists had forecast.
After the reports came out, the benchmark 10-year Treasury note price briefly widened its loss to 13/32, its yield rising to 2.83 percent from 2.77 percent late on Wednesday. Subsequently, the 10-year note trimmed that loss to 4/32, leaving its yield at 2.78 percent.
The healthier second-quarter growth appeared to give the Federal Reserve more leeway to consider trimming the amount of its large-scale purchases of Treasuries and mortgage-backed securities, meant to stimulate the economy and cut unemployment.
The drop in new claims for unemployment insurance last week was also seen as a possible sign of faster hiring in August.
"Bond yields were on the line between 2.79 and 2.80 percent at GDP time this morning and went up to 2.83 percent after the stronger number," said Chris Rupkey, managing director and chief financial economist at Bank of Tokyo-Mitsubishi UFJ in New York.
"The outlook for the economy seems pretty good with these latest stats, not too cool, not too hot certainly. Is it good enough for the Fed to taper QE, is the million dollar question?" he said, referring to the quantitative easing bond purchases.
CRT Capital Group Treasury strategist David Ader said "to the extent anyone is still trying to split hairs over tapering," the drop in new jobless claims puts "yet another notch in the coffin of QE."
The GDP report gave a more mixed verdict, with trade and inventories contributing to the strong upward revision, but final sales and investment in equipment and software revised down, Ader noted. The core personal consumption expenditure inflation index remained at 0.8 percent.
Ader said no further deterioration in Treasury prices was really warranted except to prepare for the Treasury's auction of $29 billion in seven-year notes at 1 p.m. (1700 GMT), the third and final coupon auction of the week.
The Fed will buy bonds in the long end of the yield curve as part of its $85 billion of bond and mortgage-backed securities purchases per month.
Cantor Fitzgerald Treasury strategist Justin Leder said the seven-year note auction would draw "decent" demand, especially if small price cuts occur before the sale.
"Overall, current yields, albeit off their highs - the high last week was 2.363 percent - will prove attractive," he said, citing month-end portfolio maturity extensions and uncertainty about what could develop in Syria, especially ahead of a long holiday weekend.
U.S. financial markets will be shut on Monday, September 2, for the Labor Day holiday.