* Longer-dated yields recede from four-month highs * Latest Operation Twist buy spurs bond market recovery * U.S. Fed to sell $7-$8 billion shorter-dated debt * New York Fed business index lowest since April 2009 By Richard Leong NEW YORK, Sept 17 (Reuters) - U.S. Treasury debt prices rose on Monday, recovering from Friday's sell-off tied to inflation fears, stemming from a third round of planned bond purchases by the Federal Reserve, and reduced safety bids on optimism about the European debt crisis. Longer-dated yields retreated from their highest levels since May, set on Friday, as bargain-hunting emerged and t raders prepared to sell longer-dated debt to the Fed's Operation Twist program. Weaker U.S. economic data and concerns about slowing growth in China also revived some bids for bonds, pushing yields lower. "Rates will grind lower in the short term because economic data will remain tepid," said Eric Green, global head of rates and FX research and strategy with TD Securities in New York. The New York Federal Reserve said on Monday its measure on regional business activities unexpectedly worsened in September, falling to its lowest level since April 2009. Investors have been assessing the longer-term impact of the open-ended bond buying programs from the Fed and the European Central Bank with the goals of lowering unemployment and averting a regional recession, respectively. They are concerned that by injecting more cash into the banking system, the two central banks are hurting their currencies and will have a tougher time containing inflation once economic growth normalizes. The Fed said last Thursday it will buy $40 billion a month in mortgage-backed bonds on an open-ended basis, its third round of bond buying or quantitative easing, dubbed QE3. It also prolonged its pledge to near-zero interest rates into mid-2015 from late 2014.. " The reflation trade is not going away," said Charles Comiskey, head of Treasury trading at Bank of Nova Scotia, adding the Fed is squarely focused on reducing unemployment while tolerating higher inflation with using more stimulus. This perception has fueled a rally in Treasury Inflation-Protected Securities since the Fed began QE3 on Friday. The yield premiums, or inflation breakeven rates, on regular Treasuries over TIPS jumped broadly. The 10-year TIPS breakeven rate which gauges investors inflation expectations touched 2.64 percentage points on Friday, the highest since April 2011, according to Reuters data. The 10-year breakeven rate was 2.62 points midday Monday. Another indicator that showed growing inflation concerns among investors was a steepening yield curve or widening spreads between shorter- and longer-dated yields. The spread between five-year and 30-year yields ended at 2.37 percentage points o n Friday, the widest since Sept 2011. It was last 2.32 p oints mi dday M o nday. The 30-year bond last traded up 1-2 /32 at 94 -14/ 32 after losing 3 points on Friday. The 30-year yield was 3.034 p ercent, down 6 b asis points from late on Friday. The Fed's latest purchase for Operation Twist pushed the 30-year yield to session lows. It bought $4.74 billion in Treasuries due between Nov 2020 and Aug 2022. The central bank was set to sell $7 billion to $8 billion in debt maturing in Dec 2014 to May 2015 at 2 p.m. (1800 GMT). Operation Twist, which began last year and will continue into the end of this year, was intended to lower mortgage rates and other long-term borrowing costs. Under the program, the Fed sells its holdings of shorter-dated Treasuries and buy longer-dated issues on the open market. Benchmark 10-year notes were up 11 /32 at 98 - 5 / 32, yielding 1.82 9 percent, down 4 basis points from Friday. Trading volume was lighter-than-usual due to a holiday in Japan and the Jewish New Year.