By Ellen Freilich NEW YORK, Sept 7 (Reuters) - U.S. Treasuries rallied on Friday after a weaker-than-expected August U.S. jobs report boosted hopes that the Federal Reserve would buy more bonds to help shift the economy into a gear that could create higher employment. Such purchases, dubbed QE3, or quantitative easing, would form another phase of the unconventional monetary stimulus measures the Fed has initiated as it attempts to rescue the economy from the clutches of the financial crisis. "The weaker than expected job growth number caused U.S. Treasuries to rally across the curve," Eric Stein, vice president and portfolio manager at Eaton Vance Investment Managers in Boston. "(It) all but guarantees the Fed will extend the low (interest) rate guidance at next week's policy meeting (and) makes QE3 a lot more likely." Treasuries opened lower on Friday, but moved into the plus column immediately after the jobs report came out. The benchmark 10-year Treasury note, down 13/32 before the Labor Department report, was up 20/32 afterwards, its yield easing to 1.62 percent from 1.69 percent late on Thursday and 1.73 percent on Friday before the report was released. The government said U.S. payrolls added 96,000 jobs in August. Economists had anticipated 125,000 new jobs. The unemployment rate fell to 8.1 percent in August from 8.3 percent in July, but economists said this was not a sign of improvement, but a reflection of fewer people participating in the labor force. "You can't read anything positive into the drop in the unemployment rate because participation in the labor force also declined," Stein said. Other factors - including a sharp drop in the length of the manufacturing workweek and in manufacturing output, a fall in manufacturing employment and a year-over-year 1.7 percent decline in average hourly earnings - underscored the weakness of the employment report and made Fed action more likely, boosting bond prices and allowing yields to ease, economists said. "This is a bad report and, with the results of the ISM manufacturing survey, suggests that an exports-led slowdown is coming," said Cary Leahey, managing director and senior economist at Decision Economics in New York. "It increases the chances of serious Fed action next week." The rally followed a retreat on Thursday when job market data looked more upbeat and European Central Bank President Mario Draghi said the central bank will buy unlimited amounts of short-dated bonds to help lower the borrowing costs of Spain and Italy, which are bearing the brunt of the debt crisis in the euro zone. A drop in jobless claims in the week ended Saturday and the ADP's report on private sector employment released on Thursday lifted some market expectations, or the so-called "whisper number," for Friday's jobs figures and boosted buying in the Treasury market when the data fell short of those expectations. The Fed will deliver the policy statement from its two-day policy meeting next Thursday. Other closely watched events next week will include a ruling by Germany's Constitutional Court on Sept. 12 on whether the euro zone's permanent bailout fund is compatible with German law, a vital condition for it to come into force. The Netherlands will hold elections the same day. The Treasury will also sell $66 billion in new supply next week. The sales will include $32 billion in three-year notes on Tuesday, $21 billion in 10-year notes on Wednesday and $13 billion in 30-year bonds on Thursday.