* Benchmark 10-year yield touches 3-month low
* Yuan at 4-year low, China fuels fear of currency war
* Traders pull back bets on Sept rate hike
By Michael Connor
NEW YORK, Aug 12 (Reuters) - U.S. Treasury debt prices rose on Wednesday, with yields on benchmark 10-year notes brushing a three-month low as China again shook world markets by pushing down the value of the yuan for a second day.
Wednesday's declines took the yuan to a four-year low, fueled fears of currency wars and knocked down stock markets, while encouraging buying of German, U.S. and other top-quality government debt.
Yields on 2-year German debt went to a new low of minus 0.29 percent, while Wall Street was off more than 1 percent in early trading. The MSCI world equity index declined 1.38 percent.
"China has been lingering as a problem and has now broken the camel's back," said analyst Justin Lederer at Cantor Fitzgerald in New York. "People will be keeping a closer eye on every move in China, in the currency, in all their data."
Analysts said the possible effect on the world economy from China's economic struggles, including a big drop in exports, may delay interest rate hikes by Federal Reserve policymakers.
Short-term U.S. interest rates markets signaled traders see no more than a 40 percent chance the U.S. central bank would raise rates at its Sept. 16-17 meeting. That compares to Friday, after a solid July jobs report, when traders had priced in just above a 50-percent probability.
The 10-year U.S. Treasury yield on Wednesday fell as low as 2.045 percent, the smallest since early May and below a 200-day moving average.
Prices for the 10-year note recovered some as traders readied for a $24 billion auction of the maturity later on Wednesday. It was last yielding 2.096 percent, reflecting a price gain of 12/32.
The 30-year Treasury was last up 20/32 and yielding 2.7767 percent, a level last seen April 29.
The 10-year's low market yields may dull demand at the U.S. Treasury auction, analysts said, but the sale should go well since U.S. interest rates are substantially higher than comparable rates in other big economies.
"The comparative yield between the U.S. and developed market peers has long given foreign bidders good reason to own a U.S. interest rate. UK Gilts are yielding 1.80 percent at the 10-year space, while German Bunds yield 62.8 (basis points)," BMO analyst Neil Bouhan told clients. (Additional Reporting By Richard Leong in New York; Editing by Nick Zieminski)