By Karen Brettell NEW YORK, Aug 21 (Reuters) - U.S. Treasuries were largely unchanged on Tuesday, erasing earlier price losses, as investors focused on what steps the European Central Bank will take to stem the euro zone's debt crisis. U.S. government debt yields earlier returned to three-month highs after British newspaper The Daily Telegraph revived speculation over more aggressive ECB action. The paper reported that the central bank planned to put a hard cap on Spanish and Italian bond yields. "The market has moved to the belief that (the ECB) is going to do whatever it takes," said William Larkin, fixed income portfolio manager at Cabot Money Management in Salem, Massachusetts. Treasuries erased price losses in the afternoon and stocks turned negative as doubts over the plan resurfaced. Market moves were exacerbated by light trading volumes, with many traders out for summer vacations. "You'll hear a lot of rhetoric out of Europe, but until they follow through on something, I don't think the market will react too strongly in either direction," said Matthew Duch, a portfolio manager at Calvert Investments in Bethesda, Maryland. An ECB spokeswoman, when asked about the Daily Telegraph story, referred to a statement on Monday in which the central bank dismissed a similar report from a German magazine. The ECB said it was misleading to report on policy decisions that had not been taken. Increasing optimism over further ECB action, along with improving U.S. economic data, has reduced demand for safe haven debt including Treasuries and sent yields surging from record lows a month ago. Benchmark 10-year note yields tested technical support at around 1.86 percent for the third time in the past four days on Tuesday but failed to break firmly above the level, the notes' 200-day moving average. The notes' yields last traded at 1.82 percent. They have jumped from 1.38 percent on July 25. After a four-week selloff, bonds have largely treaded water in the past four trading sessions, with little new information on the U.S. economy or the ECB's plans available to send yields into a new trading range. Treasuries are seen as likely to regain favor if market volatility picks up in September when the ECB and the U.S. Federal Reserve are next scheduled to hold their separate meetings, and as November's U.S. presidential and congressional elections approach. "A fair amount of people are sitting on gains for the year, so there could be shedding of risk and buying of Treasuries in the front-end," Duch said. The Fed sold $7.8 billion of debt due 2014 and 2015 on Tuesday as part of its Operation Twist program, in which it buys long-term debt in an attempt to reduce longer-term borrowing costs and sells short-term notes to fund the purchases.