* U.S. ISM services index rebounds from three-year low * Fed buys $1.496 billion in long-dated Treasuries * U.S. Treasury to sell $72 billion in coupon supply By Richard Leong NEW YORK, Aug 5 (Reuters) - U.S. government debt prices fell on Monday as traders reduced their bond holdings on surprisingly strong data on the U.S. services sector after Friday's market rally due to a disappointing July payrolls report. U.S. bond prices retraced some of Friday's rise in advance of this week's August refunding during which the Treasury will sell $72 billion worth of coupon-bearing debt. "We are giving up those gains on Friday. Now we are going into this week's supply and whether people want them," said Thomas Roth, executive director of U.S. government bond trading at Mitsubishi UFJ Securities USA in New York. The Treasury Department will sell $32 billon in three-year debt on Tuesday, $24 billion in 10-year notes on Wednesday and $16 billion in 30-year bonds on Thursday. With yields lingering near two-year highs, the upcoming supply might entice income-oriented investors who have stayed on the sidelines, but bidding for the new debt could be held back if investors worry about another bond market sell-off if the economy shows further improvement, analysts and traders said. On the open market, benchmark 10-year notes were down 13/32 in price with a yield of 2.650 percent, up 5.2 basis points from late on Friday when the 10-year yield traded at 2.749 percent, just below a two-year high. The 30-year bond declined 26/32 to yield 3.738 percent, up 5.0 basis points from Friday. The 30-year yield was within 6 basis point of the 23-month high set a month earlier. Exit from weekend safe haven positions due to U.S. embassy closures in the Middle East and Africa after an al Qaeda threat also caused Treasury yields to rise. While U.S. payrolls grew 162,000 last month, falling short of traders expectations, analysts said the slower hiring might not be enough to avert the Federal Reserve from scaling back its bond-purchase stimulus as early as September. Apart from the jobs report, other recent data suggested the U.S. economy is expanding albeit at a modest pace that has kept unemployment high and inflation at a worrisome low level. The Institute for Supply Management's index on the U.S. services sector rose to 56.0 from 52.2 in June, signaling ongoing improvement in retail, restaurant and other services industries. Analysts had forecast a July reading of 53.0. The latest ISM services figure matched the level last seen in February and rebounded from a three-year low. Services industries slowed their hiring in July and suppressed overall payroll growth, which disappointed investors and reduced bets the Federal Reserve might cut its monthly bond purchases later this year. Until data point to a decisive acceleration in economic growth, some fund managers are not convinced the central bank will scale back its $85 billion of monthly purchases of Treasuries and mortgage-backed securities. "The economic numbers have to be overwhelmingly convincing that there's only an upward path for the economy," said James Barnes, senior fixed income portfolio manager at National Penn Investors Trust Co. in Wyomissing, Pennsylvania. The central bank bought $1.496 billion in Treasuries that will come due in February 2036 through November 2042, as a part of its quantitative easing program, known as QE3, which is aimed at helping the economy.