By Karen Brettell NEW YORK, April 5 (Reuters) - U.S. Treasuries prices gained on Thursday as a flare-up in euro zone debt fears added a safety bid and traders awaited key employment data on Friday that will give a further indication of the strength of the U.S. economic recovery. Spain's bond yields rose on Thursday as investors worried about the country's ability to meet budget targets, a day after an auction of the country's debt saw weak demand. The renewed jitters about Europe boosted demand for safety assets including U.S. Treasuries. "The whole European situation seems to be reheating itself and there is more safe-haven type buying," said Sean Murphy, a Treasuries trader at Societe Generale in New York. Treasuries pared price gains after data showed the number of Americans lining up for new jobless benefits fell to the lowest in nearly four years last week. Investors are now focused on Friday's closely watched payroll employment data, which is expected to show that U.S. employers added 203,000 jobs in March. Market reaction to payrolls data on Friday may be choppy as trading volumes are expected to decline for the long Easter holiday weekend. The U.S. bond market will open until noon on Friday. The potential for renewed stress from Europe is leaving some investors hesitant to bet on significant yield increases in Treasuries, even as U.S. data points to a moderate economic recovery. Bearish sentiment on Europe has returned in recent days as economic data in the region has disappointed, raising fears the 17-country euro zone economy is in recession. Investors may reduce exposure in stocks on signs of a worsening situation in Europe after they made strong gains in the first quarter, said Chris Ahrens, interest rate strategist at UBS in Stamford, Connecticut. Declining stocks appetite may boost demand for Treasuries, which had the worst quarter in the first three months of the year since the final quarter of 2010. "The winds appear to have shifted a bit and I think that they will be very quick to move to the sidelines and take some profits and sit back to see how fundamental events play out," Ahrens said. U.S. government bonds have now largely retraced a selloff on Wednesday when investors were disappointed that minutes from a U.S. Federal Reserve meeting did not give indications of further monetary policy easing. "Investors are maybe having a little rethink, and thinking that the selloff might have been overdone," said SocGen's Murphy. Fed Chairman Ben Bernanke said last week that the modest pace of U.S. growth was unlikely to cut unemployment quickly and that further stimulus remains an option. Benchmark 10-year Treasuries were last up 7/32 in price to yield 2.20 percent, down from 2.22 percent late on Wednesday. Five-year notes increased 3/32 in price to yield 1.02 percent, down from 1.04 percent. Thirty-year bonds were up 9/32 in price to yield 3.34 percent, down from 3.36 percent late on Wednesday. The Treasury said on Friday it will sell $66 billion in three-year, 10-year and 30-year debt next week.