NEW YORK (Reuters) -- Treasury debt prices fell on Friday after data showing that consumer sentiment and spending remained robust, reinforcing the view that the Federal Reserve will unlikely cut interest rates any time soon.

A recent sharp drop in gasoline prices contributed to Friday's strong economic data and analysts said lower energy costs could lift fourth-quarter growth, delaying an interest rate cut that some investors have been anticipating. The dollar gained against the yen and the euro.

Benchmark 10-year notes traded down 8/32 of $2.50 for a yield of 4.81 percent versus 4.78 percent late on Thursday. The 30-year fell 14/32 or $4.30 for a yield of 4.93 up from 4.91 percent the previous session

Bonds prices fell after a government report showed retail sales, excluding gasoline, grew briskly in September. Those Losses deepened after a private report showed consumer sentiment was much stronger than expected in October.

"The market is repricing after a period when it was expecting an easing sooner than it's going to really see it," said Josh Stiles, senior bond strategist at IDEAglobal.com in New York.

"The economy after a weak third quarter may get a lift from lower gas prices in the fourth quarter so the Fed wouldn't be cutting rates in the fourth quarter. That was the message from the data this morning and that weighed on Treasuries."

Two-year Treasury notes ticked down 2/32 to yield 4.87 percent versus 4.84 percent late on Thursday. The 30-year bond dropped 13/32 for a yield of 4.94 percent, compared to 4.91 percent on Thursday. Bond yields and prices move in opposite directions.

Government bond prices initially rose on news that September retail sales fell 0.4 percent, well below economists' median forecast for a rise of 0.2 percent. However, excluding gasoline sales, retail sales rose 0.6 percent.

"The initial numbers looked very negative, so the initial reaction was that the economy is weaker and they started to buy treasurys," said Andrew Brenner, head of global fixed income at Hapoalim Securities in New York.

"When the numbers were quickly analyzed, it was the 25 percent decrease in gasoline prices over the reporting period that really caused these numbers to be as negative as they are. If you subtract gasoline, they were up 0.6 percent, so you had a reversal."

Investors have had to rethink their outlook for the economy over the last several sessions, especially after Friday's September payrolls report, which suggested a resilient economy and backed views that the central bank was not in a hurry to cut interest rates.

Treasurys had rallied since late June on expectations that slowing growth would dampen inflationary pressures, giving the Fed some leeway to ease monetary policy in early 2007.

The central bank held the fed funds rates steady at 5.25 in August and September, having raised it 17 times since June 2004.

"It was pretty much a one way bet earlier that the Fed would be cutting rates. Now that the economy is not so subject to a declining house market, some traders think the Fed's next move might actually be a rate hike," said Kim Rupert Managing Director for global fixed income analysis at Action Economics in San Francisco.

Benchmark 10-year Treasury note yields have risen by about 24 basis points since last Friday, according to Reuters data.

Analysts said bond yields were now close to attractive levels.

"Treasurys on a very short-term basis are getting ready for a temporary bounce, (but) after that rates will drift higher again. I don't think the core inflation risk has gone away yet," said Stiles.

Chicago Fed President Michael Moskow cautioned on Thursday that risks of high inflation are outstripping concerns about cooling economic growth, and as a result more interest rate increases could still be needed.

But his counterpart at the Fed Reserve Bank of St. Louis, William Poole, told Reuters he saw more risks to growth than prices and would back an interest rate cut if the economy stumbled.

In currency trading, the euro bought $1.25, down from $1.2554 late Thursday. The dollar bought ¥119.68, up from ¥119.40 the previous session.

-- from staff and wire reports

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Cheaper gas tugs on retail sales

Bonds chart