* US manufacturing unexpectedly contracts in June * Weak factory output raises QE3 expectations * Asian manufacturing data adds to global growth concerns * Investors mull last week's European rescue proposals By Chris Reese and Luciana Lopez NEW YORK, July 2 (Reuters) - U.S. Treasury debt prices advanced on Monday as investors worried that unexpectedly weak U.S. manufacturing data and doubts about a European deal to ease the region's debt crisis could make for faltering global growth. Treasury prices extended gains after data showed the U.S. manufacturing sector contracted in June for the first time since July 2009, with 30-year bond prices over a point higher. "It's weighed on equities, and it's sent money flooding back into Treasuries," said Kim Rupert, managing director of global fixed income analysis at Action Economics in San Francisco. But trading was relatively thin, she said, as many traders took a long weekend ahead of the July 4th holiday on Wednesday. Bond markets are expected to close at 2 p.m. EDT (1800 GMT)on Tuesday ahead of the holiday. The U.S. factory data added to speculation the Federal Reserve may do another round of asset purchases, known as QE3, perhaps announcing the plan as soon as the central bank's next policy meeting July 31 - Aug. 1. "There is a very good chance of QE3 at the August Fed meeting," said Jacob Oubina, senior U.S. economist at RBC Capital Markets in New York. "The implication here is a very soft second half of the year." Early in the day, Treasuries had firmed following purchasing managers surveys out of China, Japan, South Korea and Taiwan that showed slowing demand from importing centers such as Europe and the United States in June. That took the shine off an agreement by European leaders last week to let their rescue fund inject aid directly into stricken banks from next year and intervene in bond markets to support troubled members. In addition, Finland and the Netherlands cast doubts on the deal, with the Finnish government telling parliament that Helsinki and its Dutch allies would block the euro zone's permanent bailout fund buying bonds in secondary markets. Benchmark 10-year Treasury notes on Monday were trading 17/32 higher in price to yield 1.585 percent, down from 1.64 percent late Friday. Benchmark yields have been trading in a range of 1.56 percent to 1.73 percent since early June, after yields hit a record low of 1.44 percent on June 1. The Institute for Supply Management said its index of national factory activity fell to 49.7 from 53.5 the month before, missing expectations of 52.0, according to a Reuters poll of economists, and below even the lowest forecast of 50.5. It was the first time since July 2009 that the index has fallen below the 50 mark that indicates contraction. While adding to worries over the pace of global growth, the manufacturing data supported expectations the Fed will move ahead with QE3. The central bank already has purchased $2.3 trillion in mortgage-related and government debt in an effort to depress borrowing costs. In June, the Fed extended its current stimulus program, under which it is selling shorter-dated securities and buying longer-dated Treasuries. Investors are also nervously considering the prospect of the economy hitting a "fiscal cliff" with the scheduled expiration of tax cuts and deep automatic spending cuts early next year. "We look for 10-year yields to rise to 1.7 percent in the third quarter and 1.9 percent by year end," said Ralph Axel, interest rate strategist at Bank of America Merrill Lynch in New York, adding "the main driver would be a partial resolution of the fiscal cliff combined with the beginning of a large scale QE program in September." Thirty-year Treasury bonds on Monday were trading 1-08/32 higher in price to yield 2.695 percent, down from 2.75 percent late Friday.