TREASURIES-Bonds dip as market stays edgy before 3Y supply

* Bond prices fall 7th day, 3-yr yield highest since June

* U.S. Treasury to kick off 1st leg of quarterly refunding

* Traders expect good demand for $32 bln for 3-year supply

* Fed's Lacker says rethink needed on bond purchases (Updates market action, adds analyst quotes, byline)

By Richard Leong

NEW YORK, Feb 8 (Reuters) - An edgy U.S. government debt market caused bond prices to dip on Tuesday as traders braced for $32 billion in sales of three-year notes, with yields hovering at their highest levels since last spring.

Nervousness over rising commodity prices and worries that the Federal Reserve is acting too slow to curb inflation resulted in a seventh-straight declining session for bond prices.

"A lot of people are trying to decide where the market is going to go," said Mike Franzese, head of Treasury trading at Wunderlich Securities in New York. "Are yields going to blow higher?"

Richmond Fed President Jeffrey Lacker elevated the market's wariness over the timetable for the central bank to reduce its monetary stimulus. Lacker, who is known for his tough stand on inflation, said the Fed should "quite seriously" consider scaling back its $600 billion bond purchase program as the economy shows ongoing improvement.

The Fed is set to buy $1.5 billion to $2.5 billion in Treasuries that mature from August 2028 to November 2040 later Tuesday. For more, see [FED/]

Compounding the early market decline were dealers selling Treasuries to lock in yields on bonds they are underwriting this week, analysts said. About $10 billion to $15 billion in corporate bonds are expected to be sold this week, according to IFR, a unit of Thomson Reuters. For more, see [USC/]

Higher-yielding corporate bonds should be more appealing than Treasuries to investors in an improving economy.

The U.S. government is set to sell a combined $72 billion in coupon-bearing securities, part of this week's quarterly refunding.

The current spike in Treasury yields raised expectations of solid demand at the three-year note sale later Tuesday.

"There is a good chance that the auction will go fairly well," said Robert Tipp, chief investment strategist at Prudential Fixed Income in Newark, New Jersey. "The level of rates across the curve is attractive."

The three-year note yield US3YT=RR, for example, has risen about 30 basis points to 1.28 percent, hovering at its highest level since June.

In the when-issued market, traders anticipated the new three-year issue due Feb 2014 US3YTWI=TWEB would be sold at a yield of 1.328 percent, which would be highest clearing yield in nine months.

Among longer-dated issues, benchmark 10-year notes US10YT=RR were down 2/32 in price with a 3.65 percent yield, up from 3.64 percent late on Monday, while 30-year bonds US30YT=RR were down 1/32 to yield 4.70 percent, flat from Monday's close.

The Treasury will sell $24 billion in 10-year notes on Wednesday and $16 billion in 30-year bonds on Thursday. (Editing by Padraic Cassidy)